Final Project

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A Report of

A STUDY ON OPTIONS TRADING – TRENDS AND STRATEGIES AND

EFFECT ON CUSTOMERS WITH RESPECT TO

GEOJIT BNP PARIBAS FINANCIAL SERVICES LTD.

for

Geojit BNP Paribas Financial Services Ltd. St. Marks Road, Bangalore

Submitted to the

Department of Management Studies

in partial fulfillment of the

Post Graduate Diploma In Management

Under the Guidance of

Mr. Sudheendran M.

By

Mrinalini Shankar

BATCH 18 FK 1847

SCMS – COCHIN

SCMS CAMPUS, PRATHAP NAGAR, MUTTOM, ALUVA, COCHIN-683106.

September 2010

S C M SS C M SS C M S

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DECLARATION

I, the undersigned, hereby declare that this project report entitled

“ Options Trading –Trends and Strategies and effect on customers

with respect to Geojit BNP Paribas Financial Services Ltd ” has

been written and submitted under the guidance of Mr.

Sudheendran M. and is my original work.

I understand that detection of any copying is liable to be punished

in any way the school deems fit.

DATE: Mrinalini Shankar

3

SCMS – COCHIN

SCMS CAMPUS, PRATHAP NAGAR, MUTTOM, ALUVA, COCHIN - 683106.

CERTIFICATE

This is to certify that the project work entitled ‘Options Trading –

Trends and Strategies and effect on customers with respect to Geojit BNP

Paribas Financial Services Ltd.’ has been carried out under my guidance

by Mrinalini Shankar in partial fulfillment of her Post

Graduate Diploma in Management during the academic year 2009 -

2011.

DATE: Mr. Sudheendran M

ASST. PROFESSOR

SCMS-COCHIN.


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SCMS – COCHIN

SCMS CAMPUS, PRATHAP NAGAR, MUTTOM, ALUVA,

COCHIN-683106.

This is to certify that the project work entitled ‘Options Trading –

Trends and Strategies and effect on customers with respect to Geojit BNP

Paribas Financial Services Ltd.’ has been carried out by Mrinalini

Shankar in partial fulfillment of her Post Graduate Diploma in

Management.

DATE Dr. V. Raman Nair

DIRECTOR,

SCMS-COCHIN


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ACKNOWLEDGEMENT

First and foremost I would like to thank Mr. Biju Kumar (Area Vice President,

Geojit BNP Paribas Financial Services Ltd) and Mr. Karthigeyan M. (Regional

Manager -Geojit BNP Paribas Financial Services Ltd. Bangalore) for allowing me

to do the project in their organization.

I also express my sincere thanks to my company guide, Mr. Uthaman P., Branch

Manager, Geojit BNP Paribas Financial Services Ltd., Bangalore for helping me in

successfully completing the project.

I would like to express my gratitude and sincere thanks to Mr. Sudheendran M.,

my project guide for instilling confidence in me to carry out this study and

extending guidance and encouragement from time to time, without which it would

not have been possible to undertake and complete this project.

I also wish to extend my appreciation to the management and staff of my college

specially Prof. K.J. Paulose (Project Coordinator and Dean- Management Studies),

Dr. Filomina P. George (Dean- Academic Management), and our Director

Dr. V. Raman Nair, for their kind co-operation and support.

I take this opportunity to thank the staff and customers of Geojit BNP Paribas

Financial Services Ltd. for their assistance and for providing valuable information

during the course of the project.

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TABLE OF CONTENTS

SL. NO. TITLE PAGE NO.

1 Executive Summary

2 Chapter 1- Introduction and Theoretical Background 10

3 Chapter 2- Research Methodology 34

4 Chapter 3- Profile

· Company Profile 39

· Industry Profile 41

· Product Profile 45

5 Chapter 4- Data Interpretation and Analysis 50

6 Chapter 5- Findings and Conclusions 72

7 Chapter 6- Suggestions and Recommendations 74

8 Bibliography 77

9 Appendix 78

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LIST OF TABLES

Table No.

TABLE Pg. No.

1.1 Annual Volume of Exchange Traded Derivatives 26

1.2 Global Futures and Options Volume By Category 27

1.3 Top Derivatives Exchanges 28

1.4 BSE Contract Specifications 29

1.5 NSE Contract Specifications 32

3.1 Management 42

3.2 Board of Directors 43

4.1 Education Level of Customers 62

4.2 Brokerage of Geojit with Regard to Derivatives 64

4.3 Correlations - BSE Capital Market Turnover with BSE F&O Turnover 68

4.4 Regression- Model Summary- BSE Turnover with Capital Market Turnover 68

4.5 ANOVA – BSE Turnover with Capital Market Turnover 69

4.6 Coefficients- BSE Turnover with Capital Market Turnover 69

4.7 Correlations - NSE Capital Market Turnover with BSE F&O Turnover 70

4.8 ANOVA- NSE Turnover with Capital Market Turnover 70

4.9 Coefficients- NSE Turnover with Capital Market Turnover 71

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LIST OF FIGURES

Fig. No.

Figure Pg. No.

1.1 Growth in Options Trading Till 2009 25 1.2 Global Volumes in Percentage 28 4.1 Years Of Trading Experience 51 4.2 Level of Satisfaction 52 4.3 Recommendation To Prospective Customers And Acquaintances 53 4.4 Portfolio and Investment Decisions of the Investors 54 4.5 Risk Perception of Customers 55 4.6 Options Trading in American and European Options 57 4.7 Options Trading in Index and Stock Options 57 4.8 (a) Awareness on Options Trading Strategies 59 4.8 (b) Awareness of Customers in Each Strategy 59 4.9 Reasons for trading in Options 60

4.10 Effectiveness of Geojit BNP Paribas Financial Services Ltd. in Implementation of Options Trading 61

4.11 Income Level and Options Trading 63 4.12 Turnover of Index Futures and Options in BSE 65 4.13 Turnover of Stock Futures and Options in BSE 65 4.14 NSE Index Futures and Options 66 4.15 NSE Stock Futures and Options 67 4.16 Aggregate Turnover In Future and Options Segment 67

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EXECUTIVE SUMMARY

The project titled “Options Trading – Trends and Strategy and effect on customers

with respect to Geojit BNP Paribas Financial Services Ltd” is aimed at

understanding the options trading scenario in Geojit BNP Paribas Financial

Services Ltd. Options trading is a mechanism which helps the investors to reduce

their risk and maximize their return. The project also aims to study the reason for

less number of customers trading in options as compared to the equities (cash

market).

For this study, the primary data were collected by directly approaching the

customers and interview of the dealers of various branches in Bangalore.

Secondary data were also collected from the NSE and BSE websites.

From the study, it was found that the customers who deal in options were trading

high volumes. But the number of customers in the same segment is really

negligible. A meager 4% of the customers of the Bangalore main branch have

been trading in options. The customers who do not trade in options were

abstaining themselves from the options trading segment, due to the fact that they

were unable to understand the complexities of options trading. Moreover, they are

not aware of the strategies which can be made use of while trading in options.

The company has wide scope of expansion in the options trading segment. The

number of customers trading in this segment can be increased by focusing mainly

on the working class. Giving more emphasis on online trading can also pave way

to more customers in the options segment.

The company ought to be more proactive in the field of options trading promotion.

It should take steps to promote options trading among the customers. It should

also take steps to educate the customers on the advantages as well as the strategies

that can be followed in the trading of options so to tap the unlimited potential in

this segment.

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Chapter I

Introduction and Theoretical Background

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1. INTRODUCTION

India's economy bounced back with robust industrial growth, improved exports

and strong GDP growth, after a year of reduced economic growth resulting from

the impact of global events. Consequently capital expenditure and infrastructure

investments also showed an increase. Growth had been supported by markets

reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and

real estate boom, and a flourishing capital market. Improved outlook for

investment was visible across the globe and capital markets in most parts of the

world showed bullish sentiments and activity. India was viewed by global investor

community as one of the attractive investment destinations and significant FII

inflows came back into Indian Capital market.

According to the Ministry of Statistics, and Programme Implementation, the

Indian Economy has registered a growth of 7.4% in the year 2009-10 and a year

on year growth of 8.6 % for the last quarter. Improved global sentiment and

strong industrial output numbers in India are increasingly attracting foreign

investors in the country. Other factors being attributed to the revival in foreign

direct investment (FDI) in recent times include increasing consumer confidence.

India has been ranked at the third place in global foreign direct investments in

2009 and will continue to remain among the top five attractive destinations for

international investors during 2010-11, according to United Nations Conference

on Trade and Development (UNCTAD) in a report on world investment prospects

titled, ‘World Investment Prospects Survey 2009-2011' released in July 2009.

Market volumes are more than 100,000 crores. The amount of trading in cash has

been unchanged since 2007. In July 2007, average daily volumes in stocks on the

National Stock Exchange (NSE) were about 12,200 crores - which makes the

average July 2010 trading volume of 12,600 crores horribly flat, even when nearly

300 more stocks were listed or traded in the interim.. The growth has largely been

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in derivatives, and there, in the options market. India has a very vibrant stock

futures market, which some say is the biggest in the world. But stock and index

futures have traded a daily average of 33,000 crores in July 2010 - much lower

than the 40,000 crores in July 2007, three years ago.

(Source: http://in.news.yahoo.com/columnist/deepak_shenoy/14/of-options-and-

choices)

1.1 OPTIONS

In the world of investment, trillions of dollars of worth of shares are traded a day.

On any given day, traders and investors can take part in the purest form of

capitalism by putting their money at risk by buying into any of the major global

corporations across the planet in the pursuit of profit. Yet another way of

speculating is trading options which are far superior to trading in stocks. Option is

defined as:

“The right, but not the obligation, to buy (for a call option) or sell (for a put

option) a specific amount of a given stock, commodity, currency, index, or debt, at

a specified price (the strike price) during a specified period of time.”

Options trading provide the investor with leverage. Leverage is the ability to use a

small amount of capital to control a huge asset. In options, a small payment as

premium allows the investor to trade in a much higher value asset which is an

underlying asset.

Another advantage is that a trader can generate income by using credit spreads

with options. Additionally, if a stock is rumored to miss its earning projections the

investors can make a lot of money quickly by playing negative earning releases in

the right market environment. The reason is that stocks can often go down by 50%

or more on bad news. That translates into a huge profit to a smart option trader

without tying up a lot of capital.

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The "growth in volumes" is mainly due to the trading in Index options. Three

years ago, a modest volume of Rs. 4200 crores per day has now become 46,000

crores, a tenfold increase. Trading has dramatically increased in the index options

market - specifically, the Nifty options market. Nifty options are European

options. European option preference is a structural problem with the exchanges.

Sellers of (American) stock options have the "risk of exercise".

Another reason option volumes look enormous is the way options are accounted

for. A single Nifty contract is displayed as a volume of about Rs. 2.5 lakhs (50

Nifty at the 5990 mark (as on September 22, 2010) ). The actual premium for the

contract may only be Rs. 1000 (at Rs. 20 per Nifty). In effect what we see is just

'notional', with actual transaction amounts being a fraction smaller of the reported

volume number. The other side of the coin is that, people make lot of unhealthy

assumptions about volatility. The VIX - a volatility index based on option

premiums - gives an idea of volatility in the market. The VIX is now about 19,

versus the historical average of 35. Option premiums indicate market expectations

of just a 2% move in the benchmark index over the month of August 2010.

1.1.1 TERMINOLOGY IN OPTIONS TRADING

o Index options: These options have the index as the underlying. In India,

they have a European style settlement. Eg. Nifty options, Mini Nifty

options etc.

o Stock options: Stock options are options on individual stocks. A stock

option contract gives the holder the right to buy or sell the underlying

shares at the specified price. They have an American style settlement.

o Buyer of an option: The buyer of an option is the one who by paying the

option premium buys the right but not the obligation to exercise his option

on the seller/writer.

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o Writer / seller of an option: The writer / seller of a call/put option is the one

who receives the option premium and is thereby obliged to sell/buy the

asset if the buyer exercises on him.

o Call option: A call option gives the holder the right but not the obligation to

buy an asset by a certain date for a certain price. A call option is defined as

an option contract which gives the buyer the right, but not the obligation, to

buy shares of an underlying security at a specific price for a specified time.

The seller of a call option has the obligation to sell the underlying security

if and only the buyer exercises his option to buy.

For example, a buyer of one AAA April 50 call options has the right to buy

100 shares of AAA at Rs.50 till April expiration date. The buyer may

purchase these shares by filing an exercise notice through a broker prior to

the expiration date of the call option.

o Put Option: An option contract which gives the holder the right, but not the

obligation, to sell a certain quantity of an underlying security to the writer

of the option, at a specified price up to a specified date is called as put

option. The writer of a put option has the obligation to buy the underlying

security if the holder of the put option exercises his option to sell.

For example, the buyer of one AAA April 50 put option has the right to sell

100 share of AAA at Rs. 50 till April expiration date. The buyer may sell

these shares by filing an exercise notice to the broker prior to the expiration

date of the put option.

o Option price/premium: Option price is the price which the option buyer

pays to the option seller. It is also referred to as the option premium.

o Expiration date: The date specified in the options contract is known as the

expiration date, the exercise date, the strike date or the maturity.

o Strike price: The price specified in the options contract is known as the

strike price or the exercise price.

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o American options: American options are options that can be exercised at

any time up to the expiration date.

o European options: European options are options that can be exercised only

on the expiration date itself.

o In-the-money option: An in-the-money (ITM) option is an option that

would lead to a positive cash flow to the holder if it were exercised

immediately. A call option on the index is said to be in-the-money when the

current index stands at a level higher than the strike price (i.e. spot price >

strike price). If the index is much higher than the strike price, the call is

said to be deep ITM. In the case of a put, the put is ITM if the index is

below the strike price.

o At-the-money option: An at-the-money (ATM) option is an option that

would lead to zero cash flow if it were exercised immediately. An option on

the index is at-the-money when the current index equals the strike price (i.e.

spot price = strike price).

o Out-of-the-money option: An out-of-the-money (OTM) option is an option

that would lead to a negative cash flow if it were exercised immediately. A

call option on the index is out-of-the-money when the current index stands

at a level which is less than the strike price (i.e. spot price < strike price). If

the index is much lower than the strike price, the call is said to be deep

OTM. In the case of a put, the put is OTM if the index is above the strike

price.

1.2 BRIEF HISTORY OF OPTIONS

Literatures failed to record the first option contract traded. However it has been

recorded that similar to modern options contract the Romans and the Phoenicians

did contracts in shipping as early as 17th century. Evidences suggest that the

Greek mathematician and philosopher, Thales used options to enter into a contract

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to obtain olive presses at a low price in advance before the harvest season

anticipating that the harvest will be good. At the time of good harvest the demand

for olive presses increased and he lent those for higher prices than he had given to

secure these presses. This type of securing things at lower prices and selling at

higher prices is the basic idea behind options trading. Similar situation prevailed in

Holland where tulip options were traded and in London also options were traded.

But all these were done by speculators and in unregulated markets. Hence in the

early 18th century options were declared illegal in London.

1.3 BASIC CONCEPTS IN OPTIONS

Entering into an option contract means the investor is taking a position on a stock

(or related option) in a derivative market. With the basic types of options available

several variations of options positions are made. The position entered is either

termed as long or short. The long position is taken by those investors who are

bullish about the market while the short position is entered by those who are

bearish about the market.

The following type of investors depending on their financial goals and investment

objectives should consider options trading :

o Investors who wish to participate in the market without trading or holding a

large stock portfolio.

o Investors with strong market views and its future movement and want to

take the advantage of the situation.

o Investors who follow the equity market closely.

o Investors who want to protect the value of their diversified equity portfolio

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1.4 RISKS IN OPTIONS

Two types of risks are associated with options the price movement of the

underlying and the changes in volatility. Factors contributing to these risks are

many and varied. Some of the prominent factors are the state of economy, supply

and demand factors in the options market and in other related markets. The factors

affecting the values of the various underlying assets and those affecting the

volatility, liquidity and efficiency of the markets or other markets also contributes

to the risk. Other factors that may affect the pricing of particular options, the

quality or operations of the various options markets at any particular time and the

procedures of the various options markets etc also affects the risk associated with

options. Risks are generally of same type to all underlying assets.

The options holder has to encounter some of the following risk like the risk of

losing the premium paid to purchase the option in a short period or if the investor

enters into short position time decay will have tremendous effect and it so happens

that the out of the money options with shorter time expiry will suffer more.

Risks associated with an option writer will be the assignment of exercise of the

options at any time during the period of the life of option. Writer of the covered

call has to forgo the opportunity of gaining more money from the increase in the

value of the underlying stock. The naked call writer is highly in risk state and may

incur unlimited loss if the underlying price increases above the strike price.

1.5 VOLATILITY IN OPTIONS MARKET

Volatility is an important factor to be considered in options trading. Volatility is a

measure of the rate of change in the market movement in a given time either in the

upward or downward direction. If volatility is high then the premium on the option

will be high and volatility is low the premium will be relatively low. Two types of

volatility are :

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o Statistical volatility and

o Implied volatility.

While statistical volatility is the measure of actual price changes over the specified

period of time, the implied volatility is the measure of how much the market

expects the asset price to move for an option price.

Volatility is one of the variables in option-pricing formulas showing the extent to

which the return of the underlying asset will fluctuate between now and the

option's expiration. A good understanding about the volatility is required for

options trading.

1.6 TRADING STRATEGIES IN OPTIONS

A. Single Options

In single options strategy only one type and one option contract is involved. The

most common single options strategies are the covered call and the protective put.

1. Covered Call Strategy

In the Covered Call Strategy, the investor takes a long position on the call option

and writes a call on the same underlying which he already owns. This helps him to

generate income from the same asset. This is often called a buy-write position.

Here the investor is having a short-term neutral view about the market and hence

will enter into long position. This strategy helps to enter into a hedge position

since protection from the decline in stock price is made by writing a covered call.

The risk and reward associated with this strategy is low. In this strategy the main

two risks involved are the possibility of the stock price going down to zero or to

relinquish the profit if the stock price shoots up drastically. This is a single option

strategy as only one type of option comes into picture.

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2. Protective Put

In the Protective Put Strategy, the stockholder (investor) buys protective put for

the stocks he already owns. The investor who is more concerned about the

downside risk of the market and who does not wish to sell his stock enters into this

strategy. By entering into this strategy the investor is trying to protect his

unrealized profit (if any). The risk associated with this strategy is limited or the

maximum loss is limited to the strike price (stock purchase price + premium paid)

and the return or the maximum profit is unlimited as the investor can gain from

two-way or rise/fall of market movement.

B. Options Combinations

In options combinations either both type of options (put or call) or more than one

option contract is involved. Outlined below are some of the strategies which

involve options combinations.

1. Straddles and Strangles

An investor enters into either the straddle or strangles position when he thinks that

the underlying asset is highly volatile but is not sure of the direction of movement

of the market.

A Straddle Position is entered either by buying a call and a put option with the

same strike price and same expiration date (straddle buyer) or by selling a call and

a put option with the same strike price and expiry date (straddle seller).

A Strangle Position is entered either by buying a call and a put option at two

different strike prices but with same expiration date (strangle buyer) or by selling a

call and a put option at different strike prices (strangle seller).

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2. Strips & Straps

A Strip is created by buying one call option and selling two put options with the

same exercise price and exercise date. The Strap is created in the opposite way.

3. Spread Strategies

Spread Strategies are also option combination strategies. This strategy involves a

combination of two or more options on the same underlying but different strike

prices. The most common spread strategy positions are discussed below.

i. Bull Spread

Bull Spread is a strategy which involves the sale and purchase of calls and puts

that will produce maximum profit when there is a rise in price of the stock or the

underlying asset.

ii. Bear Spread

Bear Spread is a strategy which involves the purchase and sale of calls or puts that

will produce maximum profits when there is a fall in the price of the stock or the

underlying asset.

iii. Calendar Spread (Time Spread)

A spread involving simultaneous purchase or sale of options on the same

underlying stock with different expirations is known as a Calendar Spread.

Calendar spread is also known as Time Spread. Calendar spread can be further

divided into two specific variations namely Horizontal spread and Diagonal

spread. In horizontal spread, the option has identical striking prices but different

expiration dates, whereas in diagonal spread, the option has different strike prices

and different expiration dates.

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iv. Box Spread

The combination of a bull spread and a bear spread opened at the same time on the

same underlying stock is known as a Box Spread. This strategy is designed to limit

risk as well as potential profits. Also regardless of which direction the stock moves

this strategy produces a profit on either side.

v. Ratio Spread

Ratio Spread is a strategy in options trading that involves buying a number of

options and selling more options of the same underlying stock and same expiration

date but at a different strike price. This strategy is used when the underlying stock

will experience little volatility in the near term.

vi. Ratio Calendar Spread

A strategy involving a different number of options on the long side of a transaction

from the number on the short side, where the expiration dates for each side are

different. (This strategy creates two separate profit and loss zone ranges, one of

which disappears upon the earlier expiration).

vii. Ratio Calendar Combination Spread

A strategy involving both a ratio between purchases and sales and a box spread.

(Long and short positions are opened on options with the same underlying stock,

in varying number of contracts and with expiration dates extending over two or

more periods. This strategy is designed to produce profits in the event of price

increases or decreases in the market value of the underlying stock.)

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viii. Butterfly Spread

A strategy involving open options in one striking price range, off-set by

transactions at higher and lower ranges at the same time. This strategy offers both

limited risk and limited profit potential.

ix. Condor Spread

A strategy involving four options and four strike prices that has both limited risk

and limited profit potential. A long call condor spread is established by buying one

call at the lowest strike, writing one call at the second strike, writing another call

at the third strike, and buying one call at the fourth (highest) strike. This spread is

also referred to as a flat-top butterfly.

x. Credit Spread

A spread strategy which is an outcome of the difference between the values of two

options, where the value of the option sold is greater than the value of the option

purchased.

xi. Debit Spread

A spread strategy which is an outcome of the difference between the values of two

options, where the value of the option purchase is greater than the value of the

option sold.

xii. Diagonal Spread

Diagonal spread is an option strategy where the purchase of one option and

writing of another with different expiration dates and exercise prices is carried out

simultaneously.

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xiii. Vertical Spread (Money Spread)

An option strategy where simultaneous purchase of one option and writing of

another with same expiration dates, having different exercise prices creates a

vertical spread is the strategy in Vertical Spread.

1.7 OPTIONS TRADING VOLUME AND OPEN INTEREST

Price movements in the options market result from the decisions of millions of

traders. But there are a number of useful statistics besides price movements that

reflect what those other market participants are doing. Two factors to be

considered while trading options are daily trading volume and open interest.

Daily Trading Volume

Trading volume gives the important insight into the strength of the current market

direction for the option's underlying stock. The volume, or market breadth, is

measured in shares and tells a person how meaningful the price movement in the

market is.

Keep in mind that trading volume is relative and needs to be compared to the

average daily volume of the stock in question. A large percentage change in price

accompanied by larger than normal volume is a solid indication of market strength

in the direction of the change. But large percentage increases in price accompanied

by small trading volumes are less likely to indicate a market direction. In fact, they

may indicate that a reversal is likely in the near term.

The Importance of Open Interest

Open interest is always one of the data fields on most option quote displays -

along with bid price, ask price, volume and implied volatility - many traders

ignore open interest. But while it may be less important than the option's price, or

even current volume, open interest provides useful information that should be

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considered when entering an option position. Unlike stock trading, in which there

is a fixed number of shares to be traded, option trading can involve the creation of

a new option contract when a trade is placed. Open interest will tell a person the

total number of option contracts that are currently open - in other words, contracts

that have been traded but not yet liquidated by either an offsetting trade or an

exercise or assignment.

When a person buys or sells an option, the transaction needs to be entered as either

an opening or a closing transaction. If a person buy 10 of the Infosys March 27.5

calls, a person are buying the calls to 'open'. That purchase will add 10 to the open

interest figure. If a person wanted to get out of the position, a person would sell

those same options to 'close' and open interest would then fall by 10.Selling an

option can also add to the open interest. If a person owned 1,000 shares of Infosys

and wanted to do a call by selling 10 of the March 27.5 calls, a person would be

entering a sale to open. Since it is an opening transaction, it would add 10 to the

open interest. If a person later wanted to repurchase the options, a person would

enter a transaction to buy to close. Open interest would then decrease by 10.

Things get a little more complicated if the options a person trade is not created by

the transaction, but instead the other side is taken by someone doing a closing

transaction. For example, if a person is buying 10 of the Infosys March 27.5 calls

to open, and a person are matched with someone that is selling 10 of the Infosys

March 27.5 calls to close, then the total open interest number will not change.

So when a person are looking at the total open interest of an option, there is no

way of knowing whether the options were bought or sold - which is probably why

many option traders ignore open interest altogether. However, a person shouldn't

assume that the open interest figure provides no important information.

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One way to use open interest is to look at it relative to the volume of contracts

traded. When the volume exceeds the existing open interest on a given day, this

suggests that trading in that option was exceptionally high that day. Open interest

can help a person determine whether there is unusually high or low volume for any

particular option. Open interest also gives a person key information regarding the

liquidity of an option. If there is no open interest for an option, there is no

secondary market for that option. When options have large open interest, it means

they have a large number of buyers and sellers, and an active secondary market

will increase the odds of getting option orders filled at good prices. So, all other

things being equal, the bigger the open interest, the easier it will be to trade that

option at a reasonable spread between the bid and ask.

1.8 GROWTH IN OPTIONS TRADING

The growth of options trading in the global scenario has been depicted in the graph

shown below.

Figure 1.1 Growth in Options Trading Till 2009

Source: http://futures industry.org

The growth has been stagnant is the last two years. But the later years showed a

steady growth.

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1.9 ANNUAL VOLUMES IN EXCHANGE TRADED DERIVATIVES

The annual volumes of futures and options have been shown in the table given

below. The table shows that the annual volumes in the U. S. Exchange were

showing steady increase till 2008. The slight decrease in the options volumes

could be due to the economic downturn that affected the economy during the

period.

At the same time the volumes in Non U. S, Exchanges were showing a trend of

increase but the pace at which the options volume changed was reduced. It could

be seen from the table that a change of 20.06% in 2007. The percentage change

was reduced to 8.17% in 2008 and to 5.21% in 2009. That clearly indicates that

the volumes were affected by the global recession.

Table 1.1

Annual Volume of Exchange Traded Derivatives

U.S. Exchanges

2006 2007 2008 2009

Futures 2,043,926,142 2,644,564,674 2,852,549,470 2,328,114,528

% change 23.66% 29.39% 7.86% �18.38%

Options 2,529,362,212 3,446,445,874 4,101,501,346 3,987,096,642

% change 35.10% 36.26% 19.01% �2.79%

Total 4,573,288,354 6,091,010,548 6,954,050,816 6,315,211,170

% change 29.73% 33.19% 14.17% �9.19%

Non �U.S. Exchanges

2006 2007 2008 2009

Futures 3,250,147,029 4,573,164,803 5,465,149,620 5,850,991,617

% change 36.45% 40.71% 19.50% 7.06%

Options 4,050,032,383 4,862,456,753 5,259,576,767 5,533,829,312

% change �0.41% 20.06% 8.17% 5.21%

Total 7,300,179,412 9,435,621,556 10,724,726,387 11,384,820,929

27

% change 13.20% 29.25% 13.66% 6.15%

Global Total 2006 2,007 2008 2,009

Futures 5,294,073,171 7,217,729,477 8,317,699,090 8,179,106,145

% change 31.21% 36.34% 15.24% �1.67%

Options 6,579,394,595 8,308,902,627 9,361,078,113 9,520,925,954

% change 10.78% 26.29% 12.66% 1.71%

Total 11,873,467,766 15,526,632,104 17,678,777,203 17,700,032,099

% change 19.05% 30.77% 13.86% 0.12%


1.10 GLOBAL FUTURES AND OPTIONS VOLUME BY CATEGORY

Table 1.2

Global Futures and Options Volume By Category

(Based on the number of contracts traded and/or cleared at 70 exchanges worldwide)

2008 2009 % Change % of Whole

Equity Index 6,488,621,284 6,381,989,182 �1.6% 36.10%

Individual Equity 5,511,194,380 5,554,015,554 0.80% 31.40%

Currency 597,481,714 984,484,525 64.80% 5.60%

Agricultural 894,633,132 927,609,111 3.70% 5.20%

Energy 580,952,996 655,931,442 12.90% 3.70%

Non �Precious Metals 198,715,383 462,541,406 132.80% 2.60%

Precious Metals 157,443,026 151,260,666 �3.9% 0.90%

Other 44,896,671 114,436,271 154.90% 0.60%

Total 17,678,777,203 17,700,032,099 0.10% 100.00%


28

1.11 GLOBAL LISTED DERIVATIVES VOLUME BY REGION

Figure 1.2

Global Volumes in Percentage


The figure portrays the volume in percentage traded in different region. It could be

clearly understood that North America accounts for the largest volume of options

traded in the world closely followed by Asia.

Table 1.3 Top Derivatives Exchanges

Ranked by the number of futures and options contracts traded and/or cleared in 2009

Rank Exchange 2008-2009 2009-2010 % Change

1 Korea Exchange 2,865,482,319 3,102,891,777 8.30%

2 Eurex (includes ISE) 3,172,704,773 2,647,406,849 �16.6%

3 CME Group (includes CBOT and Nymex) 3,277,630,030 2,589,551,487 �21.0%

4 NYSE Euronex (includes all EU and US markets) 1,675,791,242 1,729,965,293 3.20%

5 Chicago Board Options Exchange (includes CFE) 1,194,516,467 1,135,920,178 �4.9%

6 BM&FBovespa 741,889,113 920,377,678 24.10%

7 National Stock Exchange of India 601,599,920 918,507,122 52.70%


29

1.12 INDIAN SCENARIO OF OPTIONS TRADING

The Indian scenario of options trading and the specifications put forward by the

Bombay Stock Exchange and the National Stock Exchange are explained in the

tables given below:

Table 1.4

BSE Contract Specifications

Contract

Specifications

Index Options Stock Options

Underlying

Asset SENSEX

Corresponding Stock in the

cash market

Contract

Multiplier/

Market Lot

100 times of SENSEX Stock Specific (Eg. Market lot

of Infosys is 100

Contract Month 1,2 and 3 months 1,2 and 3 months

Strike Price

Interval

50 SENSEX points. At any

time minimum 3 strikes

will be available i.e. 1 in-

the-money, 1 near-the

money and 1 out-of-the-

money

Shall have a minimum of 3

strikes i.e. 12 in-the-money, 1

near-the money and 1 out-of-

the-money

Premium

Quotation SENSEX points Rupees per share

Exercise Style European American

Tick Size 0.1 point (INR 10) 0.01

Price Quotations NA

30

Trading Hours 9.30 am to 3.30 pm 9.30 am to 3.30 pm

Settlement Style Cash

Settlement

Value

Closing value of SENSEX

on the settlement day

Closing value of the respective

stocks in the cash segment of

BSE

Exercise Notice

Time

It would be a specified time

(Exercise Session) on the

last trading day of the

contract. All in-the-money

options by certain specified

ticks would deemed to be

exercised on the day of

expiry unless the

participant communicates

otherwise in the manner

specified by the

Derivatives Segment

It is a specified time (Exercise

Session) everyday. All in-the-

money options would be

deemed to be exercised on the

day of expiry unless the

participant communicates

otherwise in the manner

specified by the Derivatives

Segment.

Last Trading/

Expiration Day

Last Thursday of the

contract month in case of

monthly & last Friday of

contract maturity in case of

weekly options. If it is a

holiday, then the

immediately preceding

business day. Note:

Business day is a day

during which the

Last Thursday of the contract

month in case of monthly &

last Friday of contract maturity

in case of weekly options. If it

is a holiday, then the

immediately preceding

business day during which the

underlying stock market is

open for trading.

31

underlying stock market is

open for trading.

Final Settlement

The final settlement of the

expiring option contracts

would be taken as the

closing value of the

underlying index. The

following algorithm is used

for calculating closing

value of the individual

stocks in the cash segment

of BSE including the

stocks constituting Sensex:

-Weighted Average price

of all the trades in the last

thirty minutes of the

continuous trading session.

-If there are no trades

during the last thirty

minutes, then the last

traded price in the

continuous trading session

would be taken as the

official closing price.

The final settlement of the

expiring option contracts

would be based on the closing

price of the underlying stock.

The following algorithm is

used for calculating closing

value of the individual stocks

in the cash segment of BSE

including the stocks

constituting Sensex:

-Weighted Average price of all

the trades in the last thirty

minutes of the continuous

trading session. -

If there are no trades during the

last thirty minutes, then the last

traded price in the continuous

trading session would be taken

as the official closing price.

Source: BSE Derivatives Contract Specifications, Bombay Stock Exchange,

Mumbai.

32

Table 1.5

NSE Contract Specifications

Contract

Specifications

Index Options Stock Options

Underlying Asset S&P CNX NIFTY Individual securities

Security descriptor N OPTIDX NIFTY N OPTSTK

Contract Size Permitted lot size shall be

200 and multiples thereof

(minimum value Rs. 2 lakhs

100 or multiples thereof

(minimum value of Rs. 2

lakhs)

Strike Price Interval Rs.20 Between Rs.2.5 and

Rs.100 depending on the

price of the underlying

Style of Option European American

Price Steps Re. 0.05 Re.0.05

Price Bands NA NA

Trading cycle The option contracts will

have a maximum of three

months trading cycle- the

near month (one), the next

month (two) and the far

month (three). New contract

will be introduced on the

next trading day following

the expiry of near month

contract

The option contracts will

have a maximum of three

months trading cycle- the

near month (one), the

next month (two) and the

far month (three). New

contract will be

introduced on the next

trading day following the

expiry of near month

contract

33

Expiry Day The last Thursday of the

expiry month or the previous

trading day if the last

Thursday is a trading

holiday

The last Thursday of the

expiry month or the

previous trading day if

the last Thursday is a

trading holiday

Settlement Basis Cash settlement onT+1 basis Daily settlement on T+1

basis and final option

exercise settlement on

T+3 basis

Daily Settlement

Price

Premium value (net). Premium value (net)

Final settlement

price

Closing value of the index

on the last trading day

Closing price of

underlying on exercise

day or expiry day. Last

trading day is the

settlement day

Source: NCFM Derivatives Core Module Work Book, National Stock Exchange Limited

The trading system has four categories of participants. The trading members are

permitted to trade their own or on behalf of their clients including the participants

and holds and ID allotted by the exchange. There are clearing members are

permitted to carry out risk management activities and confirmation/inquiry of

trades through the trading system. The professional clearing members like banks

and custodians are not trading members and they clear and settle for their trading

members. Finally, there are participants like financial institutions who trade

through multiple trading members and settles through the clearing members. The

clearing and settlement in NSE is undertaken by NSCCL (National Stock

Exchange Clearing Corporation Limited)

34

Chapter II

Research Methodology

35

2.1 TITLE OF THE STUDY

The title of the project is “Options Trading – Trends and Strategies and effect on

customers with respect to Geojit”.

2.2 RATIONALE OF THE PROJECT

High volatility associated with stock-market bottoms offers options traders

tremendous profit potential if the correct trading setups are deployed; however,

many traders are familiar with only option buying strategies, which unfortunately

do not work very well in an environment of high volatility. There are various

options trading strategies like Call back spread, Call ratio spread etc.

Hedging in financial terms is defined as entering transactions that will protect

against loss through a compensatory price movement. Hedging is the calculated

installation of protection and insurance into a portfolio in order to offset any

unfavorable moves.

2.3 OBJECTIVES OF THE STUDY

• To study the strategies in options trading adopted by Geojit.

• To examine the customer response to options trading strategies followed by

Geojit BNP Paribas Ltd.

• To examine the trend in options trading in Indian stock market.

2.4 TOOLS OF DATA COLLECTION

• A structured questionnaire is prepared for customers and the support staff

in futures and options section.

36

2.5 SAMPLING DESIGN

In statistics, a simple random sample is a subset of individuals chosen from a

larger set (a population). Each individual is chosen randomly and entirely by

chance, such that each individual has the same probability of being chosen at any

stage during the sampling process. For the study simple random sampling will be

made use of in order to collect data from the customers.

2.7 SAMPLING SIZE

For the survey 120 customers were taken in order to collect data. 80 out of the

customers were existing customers and the 40 were prospective customers.

2.8 DATA COLLECTION

• The primary data for the project were collected through questionnaires and

interview of the officials working in the futures and options department.

• For secondary data the company’s reports, published journals and monthly

reports were relied upon for data support.

2.9 DATA ANALYSIS

The quantitative analysis was done with the help of MS-Excel and SPSS

commands like Cross Tab, correlation.

2.10 LIMITATIONS OF THE STUDY

• Sample size of the study is very small.

• Time is yet another constraint in the study.

Reluctance on the part of customers to reveal information and provide data is a

constraint which has affected the study.

37

Chapter III

Profiles

39

3.1 PROFILE OF THE INDUSTRY

The Indian capital markets have witnessed a transformation over the last decade.

India is now placed among the mature markets of the world. Today, financial

markets are turbulent, globally. The most precious word today is the

“convergence” of the opportunity zones in financial markets from concept to

culmination. It may be observed that the competitive dynamics of market has

changed phenomenally.

The Indian stock market is an organized one, structured and controlled by various

governing bodies. The financial services include the banking sector, insurance,

mutual funds, NBFCs (Non Banking Financial Corporation), the share trading

brokers, Foreign Institutional Investors (FII), Foreign Direct Investors and the like.

The industry is governed by the Reserve Bank of India, Insurance Regulatory and

Development Authority, Securities Exchange Board of India, Forwards Market

Commission and other apex institutions.

The average assets under management of the mutual fund industry stood at US$

174.06 billion for the month of February 2010, an increase of nearly 36 per cent

from US$ 111.55 billion in February 2009, according to the data released by

Association of Mutual Funds in India (AMFI). India's market capitalization (m-

cap) touched US$ 1.04 trillion in June 2009 making it the ninth largest in the

world. In 2009, there were 21 IPOs that raised US$ 4.25 billion as compared to 36

IPOs in 2008 that raised US$ 3.68 billion. (Source: Http://futures industry.org)

Moreover, on the back of an increase in the participation of agriculture and other

commodities, the 23 commodity exchanges posted 50 per cent year-on-year

growth in turnover in the April-February period 2009-2010, to touch US$ 1.53

trillion, according to the commodity markets regulator, Forward Markets

Commission (FMC).

40

According to data collated by international stock market research firm Bespoke

Investment Group; India has the best PEG multiple (price earnings-to-growth)

amongst several emerging and developed markets. At over 26 times trailing P/E

multiple and an estimated 2010 GDP growth rate of 8 per cent, India (denoted

using Sensex) commands a rather comfortable PEG multiple of 3.27 times.

Technology is also helping market players redefine the way they have been

operating in the market.

The economy is expected to grow over 8% and widely recognized as one of the

stable and consistently growing investment destinations in the world. India has

inherent strengths in terms of domestic demand, skilled manpower and reliable

regulatory policies which have been widely acclaimed. This will certainly result in

a positive re-rating of the country's investment attractiveness. The recent events in

Greece, Spain and elsewhere in Europe had brought in reduced risk appetite and

reverse investment flow from the markets. The global environment and linkages

are likely to affect markets also, increasing the volatility of the markets. It is a

matter of concern that the retail investor population in the country is not growing

at a desirable rate as a result of high volatility. Regulatory changes in the fee

structure of distribution business are also a matter of concern. Consistent and high

economic growth directly affects corporate results. Also the demand for

products/services and capital investments will eventually make India an attractive

investment destination.

41

3.2 PROFILE OF GEOJIT BNP PARIBAS FINANCIAL SERVICES

LTD.

Mr. C.J. George and Mr. Ranajit Kanjilal founded Geojit as a partnership firm. In

1993, Mr.Ranajit Kanjilal retired from the firm and Geojit became the proprietary

concern of Mr. C .J. George. In 1994, it became a Public Limited Company named

Geojit Securities Ltd. The Kerala State Industrial Development Corporation Ltd.

(KSIDC), in 1995, became a co-promoter of Geojit by acquiring a 24 percent stake

in the company, the only instance in India of a government entity participating in

the equity of a stock broking company. The year 1995 also saw Geojit being listed

on the leading regional stock exchanges. Geojit listed at The Stock Exchange,

Mumbai (BSE) in the year 2000. Company’s wholly owned subsidiary, Geojit

Commodities Limited, launched Online Futures Trading in agri-commodities,

precious metals and energy futures on multiple commodity exchanges in 2003.

This was also the year when the company was renamed as Geojit Financial

Services Ltd. (GFSL). The Board consists of professional directors; including a

Kerala Government nominee. With effect from July 2005, the company is also

listed at The National Stock Exchange (NSE). Company is a charter member of

the Financial Planning Standards Board of India and is one of the largest

Depository Participant (DP) brokers in the country. On 31st December 2007, the

company closed its commodities business and surrendered its membership in the

various commodity exchanges held by Geojit Commodities Ltd. Global banking

major BNP Paribas took a stake in the year 2007 to become the single largest

shareholder. Consequently, Geojit Financial Services Limited was renamed as

Geojit BNP Paribas Financial Services Ltd.

BNP Paribas is the Eurozone’ s leading bank in terms of deposits, and one of the

10 most important banks in the world in terms of net banking income, equity

capital and market value. Furthermore, it is one of the 6 strongest banks in the

42

world according to Standard & Poor's. With a presence in 85 countries and more

than 205,000 employees, 165,200 of which in Europe, BNP Paribas is a global-

scale European leader in financial services. It holds key positions in its three

activities: Retail banking, Investment Solutions and Corporate & Investment

Banking. BNP Paribas has been operating in India since 1860.

Geojit BNP Paribas today is a leading retail financial services company in India

with a growing presence in the Middle East. The company rides on its rich

experience in the capital market to offer its clients a wide portfolio of savings and

investment solutions. The gamut of value-added products and services offered

ranges from equities and derivatives to Mutual Funds, Life & General Insurance

and third party Fixed Deposits. The needs of over 460000 clients are met via multi

channel services - a countrywide network of 500 offices, phone service, dedicated

Customer Care centre and the Internet. Geojit BNP Paribas has membership in,

and is listed on, the National Stock Exchange (NSE) and the Bombay Stock

Exchange (BSE).

Table 3.1 Management

Name Designation

Mr. C. J. George Managing Director

Mr. Satish Menon Director (Operations)

Mr. A. Balakrishnan Chief Technology Officer

Mr. K. Venkitesh National Head - Distribution

Mr. Martin Zachmeier Director (Planning and Control)

Mr. Binoy .V.Samuel Chief Financial Officer

Mrs. Jaya Jacob Alexander Chief of Human Resources

43

Table 3.2 Board of Directors

Name Designation

Mr. A. P. Kurian Non - Executive & Independent Chairman

Mr. C. J. George Managing Director & Chief Promoter

Mr.Alkeshkumar Sharma Non - Executive & Independent Director

Mr. Mahesh Vyas Non - Executive & Independent Director

Mr. Rakesh Jhunjhunwala Non - Executive Director)

Mr. Ramanathan Bupathy Non - Executive & Independent Director

Mr. Punnoose George Non - Executive Director

Mr. Olivier Le Grand Non - Executive Director

Mr. Pierre Rousseau Non - Executive Director

Company and Future plans

The company will issue 1,12,00,000 shares to employees of the Company and

subsidiaries under Employee Stock Option Plan 2010 (ESOP 2010) at such time

and in accordance with such terms and conditions as the Board/Compensation

Committee may prescribe.

Joint ventures

i. Barjeel Geojit Securities, Dubai

Barjeel Geojit continues to do well. The Company performed commendably in

both the Indian equity business, and mutual funds and insurance distribution

among NRIs in the UAE and Oman. This 30% joint venture recorded a net profit

of Rs.7.46 core, an increase of 64% over the last year. The mutual fund assets

under management handled by Barjeel Geojit increased by 69% to Rs.959 crore.

Total assets under management including equities as on 31.03.2010 is Rs.1,836

crore.

44

ii. Aloula Geojit Brokerage Company, Saudi Arabia

This 28% Joint Venture is now well positioned as a complete financial advisory

and investment solutions provider in Saudi Arabia following approval of

additional licenses for Underwriting, Asset Management, Advisory and Custody

Service in the Securities Business by the Capital Market Authority during the year.

The new licenses will allow Aloula Geojit to facilitate/advise its clients including

NRIs to be able to deal in international markets including Indian market. Saudi

Capital Market is yet to show an improvement like other world markets and

therefore revenues for the joint venture is yet to pick up. The Company incurred a

loss of Rs.11.19 crore during the year, out of which the company’s share is

Rs.3.13 crore.

iii. BNP Paribas Securities India, Mumbai

This 50% Joint Venture with BNP Paribas for institutional business improved its

revenue significantly. The current year revenue was Rs.39.31 crore higher by

146% over the previous year. On account of the inherently high cost nature of

institutional business, the Company is yet to reach the break even level. The

Company incurred a loss of Rs.14.84crore during the year, out of which the

company’s share is Rs.7.42 crore. Presently the Company has a research team

which covers 95 stocks with market capitalisation of 72 billion dollars, comprising

56% of the total NSE market capitalisation. There has been an increase in the

number of domestic and foreign institutional clients also. It is expected that the

joint venture will generate higher revenues and market share in future.

45

Business Tie-ups

Partnership with South Indian Bank and City Union Bank has been executed in

January2010 to provide online trading facility for bank's retail clients. The

Company has already tied up with Axis Bank and Federal Bank on similar lines.

The Company has also partnered with Federal Bank for offering Portfolio

Investment Scheme for NRIs during the year.

3.3 PRODUCT PROFILE:

The company is the pioneer in providing online services to customers. The

company started. This was followed by integrating the first Bank Payment

Gateway in the country or Internet Trading, and many other industry firsts. Riding

on this experience, and harnessing BNP Paribas Personal Investors’ expertise as

the leading online broker in Europe, is helping the company to rapidly expanding

its business in this segment. Presently, clients can trade online in equities,

derivatives, currency futures, mutual funds and IPOs, and select from multiple

bank payment gateways for online transfer of funds. Strategic B2B agreements

with Axis Bank and Federal Bank, enables the respective bank’s clients to open

integrated 3-in-1 accounts to seamlessly trade via a sophisticated Online Trading

platform.

Certified financial advisors help clients to arrive at the right financial solution to

meet their individual needs. The wide range of products and services on offer

includes –

o Equities

o Derivatives

o Currency Futures

o Custody Accounts

o Mutual Funds

46

o Life Insurance & General Insurance

o IPOs

o Portfolio Management Services

o Property Services

o Margin Funding

o Loans against Shares

Geojit BNP Paribas gives the option to choose from the 700 plus Mutual Fund

schemes offered by over 35 Asset Management companies such as SBI Mutual

Fund, Reliance Mutual Fund, Franklin Templeton India Mutual Fund, Tata Mutual

Fund, Sundaram BNP Paribas Mutual Fund, Fidelity Mutual Fund, and HDFC

Mutual Fund. The company has also launched exclusive branches for women.

Review of operations

The various activities of the Company showed significant improvement in revenue

and profits during the year.

a) Brokerage services

Brokerage activity saw an increase in number of active clients and volumes

compared to the previous year. The improvement in market conditions enabled the

Company to realise the benefits from the geographical expansion and

technological up gradation undertaken earlier. The Company added 12 outlets

during the year and has a total of 508 outlets. During the year, the Company

launched a newly developed online investment and trading platform called 'Flip'.

The Company expects to enhance its internet trading business with this new multi-

featured platform. Currency futures trading which was launched in October2008

picked up volumes and revenues during the year.

47

Brokerage from equity and derivatives continued to be the main source of income

of the Company and contributed 76% of the consolidated revenue during this

financial year. The Company earned brokerage revenue of Rs.231.98 crore from

capital market activities, an increase of 91% from the previous year. The total

traded volume showed an increase of 80%in the cash segment and 50% in the F &

O segment. The number of broking clients increased 16% during the year.

Brokerage revenue from internet trading grew by 111%.

b) Depository services

Number of depository accounts increased to 3.21 lakh at the end of the year and

the income from this activity increased by 35% to Rs.10.06 crore. The value of

assets under custody increased by 98% to Rs.8878 crore. 33,000 accounts were

added which represents1.69% of the increase in the active depository accounts in

NSDL and CDSL during the year. A total of 19.57 lakh active accounts were

added in both the depositories during the year, which may not be unique accounts

as clients are permitted to open depository accounts with more than one depository

participant.

c) Distribution of financial products

Revenue from distribution of mutual funds was adversely affected due to changes

in the commission payment structure during the middle of the year. The Company

is strengthening its advisory capabilities aiming to improve and standardise the

advisory skills of the employees. The management expects that this effort will

yield results in the years to come. The insurance agency of Met life continues to

do satisfactorily. However, if there are any changes in the fee structure of ULIP

policies resulting from the ongoing debate, there will be an impact resulting from

such changes. The Company has earned a total income ofRs.9.62 Crore from

distribution business during the year which was lower by 19%.

48

d) Portfolio Management Services

The portfolio management services of the Company performed very well by

providing returns much better than the benchmark returns during the year under

review. On a trailing12 month basis, till the date of this Report, the portfolio

increased by 124.92 % vis-à-vis 53.97 % increase in Sensex, and CNX Nifty

increase of 51.97 percent. There was an improvement in the assets under

management and the fees improved by 38% compared to previous year. The

Company has aggressive plans to grow the Portfolio Management Services among

high net worth resident individuals as well as non residents.

e) Financing

The financing activities in the form of margin funding showed increased revenues

corresponding to market activities. However, there is a fall in the revenues of

NBFC subsidiary on account of lower loan against shares and loan against

commodities. Total income from financing was Rs.4.01 crore.

f) IT Service and products

Geojit Technologies, the subsidiary engaged in IT development and services

achieved CMMI Level 3 certification during the year, which is recognition of the

Company's sustained commitment to deliver quality products and services to its

clients. Apart from servicing group companies, the company was able to generate

revenues from other customers and also received export orders during the year.

The Company generated consolidated revenue of Rs.11.24 crore, an increase of

69% over the previous year and a net profit ofRs.4.67 crore, an increase of 135%.

The future prospects for this division look bright as the team is continuing to get

export orders.

49

Value added services

During the year certain regulatory changes happened which enabled us to provide

value added services to clients. SEBI has allowed the Stock Exchanges to trade in

mutual funds. The Company has launched online investments in mutual funds

through National Stock Exchange of India's Mutual Funds Service System

(MFSS). IRDA has allowed life insurers to sell insurance online. The Company

has partnered with Royal Sundaram Alliance Insurance Company to distribute all

their personal lines General Insurance products and to issue policies online from

our offices.

50

Chapter IV

Data Analysis and Interpretation

51

Primary Data Analysis

In order to analyze the customer’s response to options trading and to examine the

level of understanding of the customers regarding options trading a questionnaire

was prepared and distributed among 120 customers. The data so obtained has been

analyzed below:

4.1 Years of Trading Experience

The years of trading experience of the customers with Geojit has been depicted in

the chart given below:

Figure 4.1

Years of Trading Experience

7% 4%11%

53%

25% Less than 6 months

6 months to 1 year

1 year to 3 years

3 years to 5 years

5 years or more

Interpretation:

It can be interpreted that maximum number of customers has been trading for

more than 3 years and within 5 years. It can be analyzed that the company has

52

more retention of customers than new customers opening trading accounts. The

number of customers in the branch is around 200 of which most of the customers

are trading in equities rather than derivatives and options.

4.2 Level of Satisfaction

The following chart shows the level of satisfaction of customers with Geojit. Most

of the customers are satisfied with the company, the majority being highly and

somewhat satisfied followed by neutrally satisfied. The second chart shows the

recommendation made by the customers to other acquaintances which also shows

the level of satisfaction of customers.

Figure 4.2

Level of Satisfaction

Level of Satisfaction

25%

43%

11%

21%0%

Highly Satisf ied

Somew hat satisf ied

Neutral

Somew hat dissatisf ied

Highly Dissatif ied

53

Figure 4.3

Recommendation To Prospective Customers And Acquaintances

22.22222222

59.25925926

18.51851852

0

10

20

30

40

50

60

No NeverRecommended

Have RecomendedOnceor Twice

Have RecommendedSeveral Times

Interpretation:

From figure 4.2, the level of customer satisfaction with the company and its services can

be inferred. The graph clearly suggests that the majority of the customers are happy with

the services provided by the company. 43% of the respondents are somewhat satisfied

with the services of the company, where ascot a single customer is dissatisfied with the

services of the same.

The figure 4.3 also provides an insight as to whether the customers advocate the company

to their friends and acquaintances. This clearly shows two things- the level of satisfaction

and the scope for further account openings in the firm.

54

4.3 Investment Decisions of the Investors

The investment decisions of the customers are based on the risk perception and

return portfolio.

Figure 4.4

Portfolio and Investment Decisions of the Investors

0

5

10

15

20

25

30

equity MutualFunds

IPO Futures PMS Options Insurance

Stock Traded By customers

Series1

Interpretation:

From figure 4.4, it can be analyzed that the majority of the customers are trading in

equity stock. The introduction of options was to reduce the risk associated with the stock

trading. But from the responses elicited from the customers it can be analyzed that the

investors are still to understand the importance of options trading.

The reason for low trading in options could be due to lack of awareness among the

investors regarding the benefits of stock options. As far as the Geojit BNP Paribas

55

Financial Services Ltd Bangalore main branch is concerned only 8 out of the 200

odd customers are actively trading in options.

It should also be noted that although options was introduced to reduce the risk, the

complexities associated with options trading bars the investors from entering the

options trading field.

4.4 Risk Management and Risk Preference of Customers:

Figure 4.5

Risk Perception of Customers

Risk in Portfolio

0 2 4 6 8 10 12 14

Low Risk/ Low Return

Low Risk / Low return to moderate return

Moderate risk / moderate return

Moderate to high risk/ moderate tohighreturn

High Risk / High Return

Series1

56

Interpretation:

The above figure represents the risk perception of the employees regarding options

trading. Of the respondents who answered the question of risk perception, 12

customers believe that they would go in for moderate risk with moderate return

portfolio. At the same time only 5 customers would go an extra step to earn a high

return taking a high risk portfolio.

The chart can be analyzed and the following observations can be obtained:

o The customers are interested in taking calculated risk and in obtaining an

assured rate of income.

o There are risk venturing customers, who would prefer high risk high return

portfolio also.

o Since customers prefer moderate risk moderate return portfolio, the scope

for options trading is vast as the customers can obtain high returns at

moderate risks.

This would further advocate that the investors have the option of playing safe.

Hence there is ample scope for options trading as the trading in options is aimed at

risk reduction and maximizing returns.

The awareness of the options trading strategies put forward by the NSE is

virtually nil and this could be one reason why customers tend to purchase equity

and prefer not to trade in options.

4.5 Trading in Options

The customers trading in options were asked about the type of options they trade

in. The charts given below give an insight as to the trading in American Options

57

and European Options as well as trading in the index option as well as stock

options segment.

Figure 4.6

Options Trading in American and European Options

American Options

European Options

S1

75%

25%

0%10%20%30%

40%50%60%

70%80%

Series1

58

Figure 4.7

Options Trading in Index and Stock Options

Trading in Options

80%

20%

Index Opt ions

Stock Opt ions

Interpretation:

The number of customers, trading in stock options are more as compared to the

index options. The customers trading in American options are more. The reason

behind this is that in India most of the options are American options.

The index options in India have a European settlement method and hence the

graph depicts more number of customers in the American options segment.

4.6 Awareness on Strategies

The awareness of the customers regarding the options trading strategies is depicted

in the figure given below:

59

Figure 4.8(a)

Awareness on Options Trading Strategies

13%

87%

Aware about the strategies

Not Aw are

Figure 4.8(b)

Awareness of Customers in Each Strategy

105 4

2011

30

128

051015202530

Customers no. in %

Short call butterfly

Long call butterfly

Long straddle

Bear put spread

strategy

Bull call spread

strategy

Bull put spread

strategy

Bear call spread

strategy Collar

Strategies

60

Interpretation:

The awareness among the customers regarding the options trading strategies have

been depicted in the above graph. The majority of customers were not aware of the

strategies put forth by the NSE in its options trading module. Of the customers

who are aware of the strategies, the percentage of the same is depicted above.

Only 13 % of the customers are aware of the options trading strategies. Out of that

13%, 30% of the customers are aware of the Bull put spread strategy and 20% are

aware of Bear put spread strategy. This requires that the company should work on

improving the knowledge of its customers regarding options trading and thereby

increase the volume of options trading.

4.7 Reasons for Trading in Options:

Figure 4.9

Reasons for trading in Options

Reasons for Options Trading

34%

36%

0%1%

20%

9%

Reduction in Risk

Returns

Leverage

Availability

Volatility

Aw areness

61

Interpretation

Figure above represents the factors affecting customers’ choice of options trading

as against trading on equity. The return is the reason why most of the customers

have turned to options trading. The advantage of hedging is also yet another

reason for the customers picking options as an investment opportunity. The

customers in Geojit who trade in options are mostly the retired class and hence

they expect risk free consistent income. The risk in options trading is limited to the

premium amount of the option. Hence that is also yet another factor which affects

options trading.

4.8 Effectiveness of the Company

The following graph represents the effectiveness of the company in

implementation of options trading strategies.

Figure 4.10

Effectiveness of Geojit BNP Paribas Financial Services Ltd. in

Implementation of Options Trading

Yes to anExtent Somew hat

successful Don’t think ithas beeneffective

S105101520253035404550

No. Of Customers

Responses

Effectiveness of Geojit in implementing Strategies

62

Interpretation:

It can be understood from the graph that almost 40 to 45 % of the customers

believe that the company has been effective in implementation of the options

trading strategies. The customers have admitted that the dealers who assist the

investors in trading in options have always gone an extra mile in giving advice to

the customers regarding the various profitable opportunities in options trading.

4.9 Education Level and Options Trading

The following table shows the educational qualification of the customers of the

options trading segment.

Table 4.1

Education Level of Customers

Educational Qualification No. Of Customers (in

%) Under Graduate 20

Graduate- Arts, Science and Commerce Stream 60 Graduate - Professional Stream 17 Post Graduate 3

The majority of the Geojit Bangalore branch customers are graduates trading in

options.

63

4.10 Income level and Options Trading

Figure 4.11

Income Level and Options Trading

2

25

61

12

0

10

20

30

40

50

60

70

Number of Customers

>100000 100000-300000

300000-500000

<500000

Income

Series1

Interpretation:

From the figure above it can be inferred that almost 70% of the customers that

trade in options are coming under the income group of Rs. 300000 to Rs.500000.

4.11 Brokerage of Geojit in the Options Trading Segment:

The brokerage varies as per the volume traded by the customers. The following

table represents the brokerage charged by Geojit With regards to the derivatives

trading:

64

Table 4.2

Brokerage of Geojit with Regard to Derivatives

Normally the company charges a brokerage of Rs.75 per lot of the options traded.

But in case of high volumes, the brokerage will be pulled down to as low as Rs.30.

The brokerage charged by Geojit can influence customers to trade more volumes

in the options market. This is so because as the volume of trading is increased the

brokerage is reduced. This can help in encouraging the customers to increase the

volume traded.

Secondary Data Analysis

Performance of F& O Segment

In the following analysis, the performance of F&O Segment of BSE and NSE

based on monthly turnover data downloaded from the database of Reserve bank of

India have been examined. The figures from BSE and NSE have been taken and

worked out with ANOVA to measure the impact of F&O Turnover on the Capital

Market Turnover in both the exchanges. The following figures give a graphical

presentation of monthly turnover of F&O in both NSE and BSE.

65

Figure 4.12

Turnover of Index Futures and Options in BSE

Source : BSE Website

The chart indicates large turnover in respect of index futures compared to stock

futures. Besides the stock futures show sharp decline, almost nil trading after

April.

Figure 4.13

Turnover of Stock Futures and Options in BSE


66

The stock options show meager turnover while the stock futures show a higher

turnover.

Figure 4.14

NSE Index Futures and Options


The futures and options turnover in NSE during the initial period is found to be

very low compared to that in BSE. But the turnover picked up from September

and went above the turnover of BSE. The turnover in the case of options is lower

than that for futures.

67

Figure 4.15 NSE Stock Futures and Options

Source : NSE Website

The stock futures show a higher turnover than options. The option turnover show

almost steady pattern. The stock futures reached the peak level in May and then

started declining.

Figure 4.16

Aggregate Turnover In Future and Options Segment


68

The aggregate turnover of F&O segment taking the trading in both NSE and BSE

together shows that the futures trading turnover and aggregate F&O turnover show

the same trend indicating that futures constituted the major and deciding

component in F&O segment operations. Having studied the level of significance

of F&O segment in the capital market turnover, in both BSE and NSE by

calculating Karl Pearson's Coefficient of Correlation and Linear Regression the

following have been observed.

Table 4.3

Correlations - BSE Capital Market Turnover with BSE F&O Turnover

F&O Capital Market

F&O Total Turnover Pearson Correlation 1.000 .009

Sig. (2-tailed) . .943

N 64 64

Capital Market

Turnover

Pearson Correlation .009 1.000

Sig. (2-tailed) .943 .

N 64 64

Table 4.4

Regression- Model Summary- BSE Turnover & Capital Market Turnover

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .009 .000 -.016 783626.9853

A Predictors: (Constant), VAR00001

69

Table 4.5

ANOVA- BSE Turnover & Capital Market Turnover

Model Sum of Squares Df Mean Square F Sig.

1 Regression 3121239320.938 1 3121239320.938 .005 .943

Residual 38072417631485.950 62 614071252120.741

Total 38075538870806.880 63

a Predictors: (Constant), F&O Turnover

b Dependent Variable: Capital Market Turnover

Table 4.6

Coefficients - BSE Turnover & Capital Market Turnover

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

Model B Std. Error Beta

1 (Constant) 1251478.656 107944.017 11.594 .000

F&O 6.347 89.020 .009 .071 .943

a Dependent Variable: Capital Market Turnovers

The above analysis clearly indicates that the F&O turnover in BSE is quite

insignificant and does not have any impact on the capital market turnover.

70

Table 4. 7

Correlations - NSE Capital Market Turnover with BSE F&O Turnover

F&O Capital market

F& O Total

Turnover

Pearson Correlation 1.000 .966

Sig. (2-tailed) . .000

N 64 64

Capital Market

Turnover

Pearson Correlation .966 1.000

Sig. (2-tailed) .000 .

N 64 64

** Correlation is significant at the 0.01 level (2-tailed).

Table 4.8

ANOVA - NSE Capital Market Turnover with BSE F&O Turnover

Model Sum of Squares Df Mean Square F Sig.

1 Regression 105162156015.535 1 105162156015.535 854.422 .000

Residual 7630951813.795 62 123079867.964

Total 112793107829.330 63

a Predictors: (Constant), F&O Turnover

b Dependent Variable: Capital market Turnover

71

Table 4.9

Coefficients - NSE Capital Market Turnover with BSE F&O Turnover

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

Model B Std.

Error

Beta

1 (Constant) 46385.076 1971.295 23.530 .000

F&O .209 .007 .966 29.230 .000

a Dependent Variable: Market Turnover

The analysis indicates significant correlation between NSE F&O segment turnover

and capital market turnover. It also indicates a high correlation between the capital

market turnover and F&O segment in NSE.

72

Chapter V

Findings and Conclusions

73

5.1 FINDINGS

The following findings have been incurred from the study:

o The volume in options trading is really high. But the number of customers

dealing in options is really low. This can be understood from the simple

fact that only 4 % of the customers in the Bangalore branch are trading in

options; at the same time the branch has got high revenues from the F& O

section as well. The lack of awareness in the strategies is the reasons for the

low number of customers in options segment.

o Customer’s awareness about the options trading is low. The customers are

not aware of the advantages of options like hedging, reduction in risk and

limiting the risk to the premium amount and the unlimited opportunity of

getting profits.

o The company is charging a brokerage of Rs.75 per lot. It may be lowered as

low as to Rs. 30 when the volumes exceed Rs.36 Crore. This has

encouraged the existing customers to trade more volumes.

o The strategies of options trading help in getting a better position on the

trading front. The awareness of the Geojit customers in this respect is as

low as 13%.

o The customers, who trade in options, are basically of the income group of

Rs.300000 to Rs.500000. Only 12% of the customers have income level

above Rs.500000.

5.2 CONCLUSIONS

It can be seen from the study that the options trading segment is much untouched

segment by most investors as it requires market knowledge and hence there is

great scope for the company to increase their options trading volume.

74

Chapter VI

Suggestions and Recommendations

75

6.1 SUGGESTIONS AND RECOMMENDATIONS

The following recommendations can be helpful in getting more customers to

respond to the strategies:

o Awareness among customers regarding the options trading strategies can be

done by:

o Sending Newsletters to customers regarding the options trading

o Include more of the Options Trading news in Geodata, the

monthly journal of Geojit so that customers can be made aware.

o Including details of options trading strategies in the Geodata.

o The company should give training programmes to its customers

about options and the strategies for successful options trading .

o The company should focus on the existing customer base. As

Geojit is a well established company, the customer base is wide.

The existing customers mainly trade in equity (cash market) and

the mutual fund schemes. By evaluating the existing customers,

their reasons for not trading in the options segment can be done.

Creating awareness among the existing customers and motivating

them to trade in options can also be an effective method to get

more customers to options trading.

o The company can also go in for online forum creation for

customers where dealers and other employees form part of the

same. This can enable better exchange of ideas.

o The volume is increasing in the options segment but the number of

customers trading is not as high as that of equities or other securities. This

opens up an opportunity for the company to tap the customers in options

segment.

76

o The company needs to bring about new marketing strategies in order to

promote options trading. The company was successful in its efforts to bring

new customers by providing free DEMAT and trading account opening and

zero Annual Maintenance Charges for the first year. The company should

bring out schemes for options trading like reduced brokerage, waiver of

o Annual Maintenance charges for those customers who trade in options

above a stated volume. The company can also give credit facility for the

customers in payment of brokerage and other payments due to the company.

o The company should also take up advertising activities for its futures and

options segment. Geojit does not at present individually advertise for each of

its product class. Hence they need to come up with advertisements which

advocate the advantages of options trading

o The company may also promote online trading, by way of which the

customers may get into options trading. This is so because options trading

requires constant market watch and hence is difficult to do offline. The

working class can be benefited out of online trading and hence can attract

more customers to options trading.

o The education level of the customers in options trading segment is

confined to graduate level. This is an added advantage for the company as the

company can easily educate the customers on options trading, its strategies and

advantages.

77

BIBLIOGRAPHY

Books

• Allaire, Marc J, Options essential concept and trading strategies, 2nd edition.

Richard Irwin & Co, 1995.

• Khan, M Y., and P K Jain. Financial Management. Tata- McGraw Hill, 2008.

Web sites reference

o http://news.moneycontrol.com , July 3, 2010

o http://www.investopedia.com July 11, 2010

o https://gcc.geojit.net/geodata_index.asp , July, August, September, 2010.

o www.nseindia.com, September 2010

o www.bseindia.com, September 2010

http://news.moneycontrol.com/

http://www.investopedia.com/

78

Appendix

79

Questionnaire

Analysis of Customer Satisfaction and Options Trading

Strategies.

Dear Sir / Madam,

I am Mrinalini Shankar, a PGDM student of SCMS Cochin. I am conducting a

survey on customer satisfaction and options trading strategies of Geojit BNP

Paribas Financial Services Ltd. Kindly cooperate with the same and please provide

relevant data for the successful completion of survey. I also assure that the details

provided will be kept confidential and used for academic purpose only.

1. Name of the customer :

2. Gender : Male Female

3. Age :

18 – 24 25 – 34 35 – 44 45 – 54 55 – 64 65 or older

4. Highest Educational Qualification:

(Please mention)

5. Occupation and annual income

(Please mention) :

6. How long have you been trading with Geojit BNP Paribas Financial

Services Ltd.?

80

Less than 6 months 6 months to less than 1 year

1 year to less than 3 years 3 years to less than 5 years

5 years or more Not yet trading with Geojit

7. How would you rate your overall level of satisfaction with Geojit BNP

Paribas Financial Services Ltd.?

Highly satisfied Somewhat satisfied

Neutral Somewhat dissatisfied

Highly dissatisfied

8. Rank the following as per your expectation from a financial service

provider?

(0 to 10)

a) Regular feedback b) Transparent dealing

c) No hidden cost/charges d) Customized offers

e) Low Brokerage/commission f) High quality services

g) Goodwill h) No. of branches in locality

i) Any other (Please specify)………………

9. How often do you use our services?

Don't Use Daily Weekly Monthly Quarterly

Online trading

Offline Trading

Flip software

10.Which are the various products that you trade in? Please check which ever

applies.

Equity Mutual Funds

IPO Futures

PMS Options

Others Specify ……………….

81

11. If you are trading in options, what are the reasons for trading in options?

Kindly rank those from 1 to 6 based on priority, 1 being the highest priority

and 6 the lowest.

Risk Factor

Returns

Availability

Volatility

Leverage Awareness

12.Which of the following portfolios would you like to invest in. [NPlease tick]

a) Low risk / Low return portfolio

b) Low to Mod risk / Low to Mod return portfolio

c) Moderate risk / Moderate return portfolio

d) Mod to high risk / Mod to high return portfolio

e) High risk / High return portfolio

13.Are you aware of the options trading strategies put forward National

Stock Exchange, incase you deal in options trading?

Yes No

14. What are the strategies you think Geojit BNP Paribas Financial Services

Ltd. is adopting in options trading? ( Please tick whichever applies )

Short call butterfly Long straddle

Long call butterfly Collar

Bear call spread strategy Bear put spread strategy

Long call condor Bull call spread strategy

Short call condor Bull put spread strategy

15. Do you think Geojit has been effective in implementing these strategies?

Yes, to a great extent

Somewhat successful

Don’t think it has been effective

16. If you are undertaking options trading, which type of options do you trade

in?

82

Choose one : Index Option Stock Option

Choose one : American options European options

17. Have you ever felt difficulty in choosing the right underlying stock for

options trading?

Never

Once or twice

Yes always

18. Which asset classes do you make use of in trading?

Equity (including Mutual Funds) Gold

Real Estate Fixed deposits

Insurance Government Bond

NSC/KVP PPF

19. Have you ever recommended us to others?

No, never recommended

Have recommended once or twice

Have recommended several times

If Yes, please mention reason

…………………………………………………………....…………………………

If No, Why?

…………………………..…………………………………………………………

Thank You

Final Project

Documents

Transcript of Final Project