Market trend analysis using derivatives and analysis for the options using Greeks

Abstract

The emergence of Derivatives market especially Futures and Options can be traced back to the willingness of the risk adverse economic agents to guard themselves against the fluctuations in the price of Underlying asset. Derivatives, whose price is determined by the price of underlying asset, generally do not cause any fluctuations in the price of underlying asset. But impact of any change in the price of underlying asset may cause swift change in the price of Derivatives instrument. Thus, it is imperative for an investor to understand how the market movement can be tracked using the past data so that the appropriate investments could be made. In the first part of the project, we tried to use the S&P CNX NIFTY data for the futures and options for the last three years to evaluate the different parameters which will be relevant in deciding the market trends. Then, using those parameters, we have tried to indentify the period of bearish as well as bullish investment sentiments. Secondly, the project tries to indentify different combinations of the call and puts options available in the derivative market and to understand the logic behind selection of different option strategies at different point of times. The project implements the different option strategies for bullish as well as bearish market periods to identify the strategy which maximizes the payoff of the investors and tries to seek the criteria for selecting the appropriate strategy using the technical analysis of the parameters of option. Finally, the project concerns one of the core issues in Derivatives-Pricing of Derivatives and impact of change in price of underlying to the price of Futures and Option through scenario analysis , valuation of Option and Futures through appropriate mathematical models and comparison of actual market price with theoretical price from past trend of Options and Futures market and daily movements in Nifty Spot , Nifty Futures and Options. Also, it tries to understand the importance of Option Greek in evaluating changes in the pricing with different market changing parameters. During the project, it was identified that parameters namely open interest, volume and underlying price for futures could be used to identify the market trend whereas for options, parameter relevant are Put-tocall ratio and volatility. Also, it was observed that besides understanding the market movement, an investor need to identify and evaluate different option strategies on the basis of period of investment, his risk bearing capacity, cost of the investment etc. Further, it was observed that the Option Greeks play an important role in understanding the pricing of the options and price change with respect to changes in market parameters like spot price, volatility etc.