ACKNOWLEDGEMENTWe owe our gratitude to many people who helped and supported us during the entire Summer Training. Our sincere thanks to Prof.Aman Chugh, the Guide of the project, for initiating and guiding the project with attention and care. He has always been available for us to put us on track from time to time to bring the project at its present form. We also thank our Institution and faculty members without whom this project would have been a distant reality. Abhianv Chaturvedi Mahima Jindal Mohit Bajaj 1 TABLE OF CONTENTS Chapter No. 1 2 3 4 5 6 Chapter Title Page No. Introduction Derivatives Introduction to Future Introduction to Option Hedging Strategies Company Profile Research on Investor Awareness Regarding Hedging. 7 8 Findings of the Stuys Conclusion and Recommendations Annexure – Questionnaire 2 LIST OF TABLES TABLE NO. 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 PAGE NO. TABLE TITLE Respondents deal in share market. Frequency of investment in the market Amount which consider good for investment purpose To know the number of investors and traders Popularity of hedging concept Various techniques of hedging used by traders Reason for preferring hedging Reason for not preferring hedging Hedging really restrict losses Hedging strategies really works When will hedging strategies give more benefits 3 4 6.3 6. Frequency of investment in the market Amount which consider good for investment purpose To know the number of investors and traders Popularity of hedging concept PAGE NO. 6.5 FIGURES TITLE Respondents deal in share market.2 6. 4 .1 6.LIST OF FIGURES FIGURE NO. The underlying asset can be equity. (ii) a contract which derives its value from the prices. loan. commodity or any other asset. As instruments of risk management. share. of underlying securities. most notably forwards. MEANING: The emergence of the market for derivative products.1. these generally do 5 .Introduction To Derivatives Derivative is a product whose value is derived from the value of one or more basic variables. According to the Securities Contract Regulation Act. (1956) the term “derivative” includes: (i) a security derived from a debt instrument. By their very nature. Through the use of derivative products. called bases (underlying asset. can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. whether secured or unsecured. in a contractual manner. forex. the financial markets are marked very high degree of volatility. futures and options. or index of prices. index. it is possible to partially or fully transfer price risks by locking-in asset prices. risk instrument or contract for differences or any other form of security. . or reference rate). Derivatives are weighted lightly than other assets that appear on bank balance sheets. interest etc. In Britain unit trusts allowed to invest in futures & options . Derivatives are risk management instruments. companies and investors to hedge risks.not influence the fluctuations in the underlying asset prices. to gain access to cheaper money and to make profits Derivatives are likely to grow even at a faster rate in future they are first of all cheaper to world have met the increasing volume of products tailored to the needs of particular customers. Year Annual turnover 1986 1992 1998 2002 & 2003 146 millions 453 millions 1329 millions it has reached to equivalent stage of cash market Derivatives are used by banks. Annual turnover of the derivatives is increasing each year from 1986 sonwards. by locking-in asset prices.The capital adequacy norms for banks in the European Economic Community demand less capital to hedge or speculate through derivatives than to carry underlying assets. trading in derivatives has increased even in the over the counter markets. index. securities firms. However. which derive their value from an underlying asset. share. bonds. The size of these off-balance sheet assets that include derivatives is more than seven times as large as balance sheet items at some American banks causing concern to regulators 6 . The underlying asset can be bullion. derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. currency. 2. where settlement takes place on a specific date in the future at today’s pre-agreed price.1 Types of Derivative Contracts 1. Options: Options are of two types – calls and puts Calls give the buyer the right but not the obligation to buy a givenquantity of the underlying asset.1. 3. 4. Futures contracts are special types of forward contracts in the sense that the former are standardized exchangetraded contracts. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have two lives of up to one year. 7 .a given future date. Leaps: The acronym LEAPS means Long-term Equity Anticipation Securities. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Puts give the buyer the right. 5. These are options having a maturity of up to three years. Forwards: A forward contract is customized contract between two entities. at a given price on or before. the majority of options traded on options exchanges having a minimum maturity of nine months. Longerdated options are called warrants and are generally traded over-the-counter. Currency swaps: These entail swapping both principal and interest between the parties. Baskets: Basket options are options on portfolios of underlying assets. 8 .6. The underlying asset is usually a moving average of a basket of assets. Rather than have calls and puts. with the cash flows in one direction being in a different currency than those in the opposite direction. They can be regarded as portfolios of forward contracts. A payer swaption is an option to pay fixed and receive floating. A receiver swaption is an option to receive fixed and pay floating. Swaptions: Swaptions are options to buy or sell that will become operative at the expiry of the options. 8. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. Thus a swaption is an option on a forward swap. the swaptions markets has receiver swaptions and payer swaptions. 7. Equity index options are a form of basket options. The two commonly used swaps are: Interestrate swaps:These entail swapping only the interest related cash flows between the parties in the same currency. 9 .1. Derivatives markets help increase savings and investment in the long run. With the introduction of derivatives. are linked to the underlying cash markets. Hedgers use the derivatives markets primarily for price risk management of assets and portfolios. speculators trade in the underlying cash markets. In the absence of an organized derivatives market. the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. 3. 4. • Speculators: These are individuals who take a view on the future direction of the markets. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives. due to their inherent nature. 2. Transfer of risk enables market participants to expand their volume of activity. They take a view whether prices would rise or fall in future and accordingly buy or sell futures and options to try and make a profit from the future price movements of the underlying asset. Speculative trades shift to a more controlled environment of derivatives market.3 Participants in a Derivative Market The derivatives market is similar to any other financial market and has following three broadcategories of participants: • Hedgers: These are investors with a present or anticipated exposure to the underlying asset which is subject to price risks.2 FUNCTIONS OF THE DERIVATIVES MARKET: The derivatives market performs a number of economic functions. 1. They are: 1. 10 .• Arbitrageurs: They take positions in financial markets to earn riskless profits. The arbitrageurs take short and long positions in the same or different contracts at the same time to create a position which can generate a riskless profit. 1 Futures Terminology Spot price: The price at which an underlying asset trades in the spot market. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. It is a standardized contract with standard underlying instrument. the exchange specifies certain standard features of the contract. Futures price: The price that is agreed upon at the time of the contract for the delivery of an asset at a specific future date. To facilitate liquidity in the futures contracts. 11 . But unlike forward contracts. the futures contracts are Standardized and exchange traded. The standardized items in a futures contract are: • Quantity of the underlying • Quality of the underlying • The date and the month of delivery • The units of price quotation and minimum price change • Location of settlement 2. a standard quantity and quality of the underlying instrument that can be delivered. (or which can be used for reference purposes in settlement) and a standard timing of such settlement.2 Introduction to Futures A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. 12 . Contract size: The amount of asset that has to be delivered under one contract. In a normal market. a new contract having a three-month expiry is introduced for trading. Short position: Outstanding/ unsettled sales position at any point of time. only one side of the contracts is counted. There will be a different basis for each delivery month for each contract. This reflects that futures prices normally exceed spot prices. On the Friday following the last Thursday. for calculation of open Interest. Contract cycle: It is the period over which a contract trades. Expiry date: is the date on which the final settlement of the contract takes place. two-month and three-month expiry cycles which expire on the last Thursday of the month. Open interest: Total outstanding long or short positions in the market at any specific point in time. Basis: Basis is defined as the futures price minus the spot price. The index futures contracts on the NSE have one-month. basis will be positive. As total long positions for market would be equal to total short positions. Open position : Outstanding/unsettled long or short position at any point of time. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. This is also called as the lot size. Long position: Outstanding/unsettled purchase position at any point of time. 13 . it means that the losses as well as profits. Cost of carry: Measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset.2Pay off for futures: A Pay off is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. In simple words. the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. Maintenance margin: Investors are required to place margins with their trading members before they are allowed to trade. If the balance in the margin account falls below the maintenance margin. for the buyer and the seller of futures contracts. This is called marking-to-market. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. 2. are unlimited. Marking-to-market: In the futures market. at the end of each trading day. Futures contracts have linear payoffs. 1 14 . The underlying asset in this case is the Nifty portfolio. When the index moves up. He has potentially unlimited upside as well as downside. the long futures position starts making profits and when the index moves down it starts making losses profits 5000 snifty loss Figure: 2. Take the case of a speculator who buys a two-month Nifty index futures contract when the Nifty stands at 5000. Pay off for Buyer of futures: (Long futures) The pay offs for a person who buys a futures contract is similar to the pay off for a person who holds an asset. loss 5000 profits Figure:2. He has potentially unlimited upside as well as downside. The underlying asset in this case is the Nifty portfolio. the short futures position starts making profits and when the index moves up it starts making losses. Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at5000.2s 15 . Pay off for seller of futures: (short futures) The pay offs for a person who sells a futures contract is similar to the pay off for a person who shorts an asset. When the index moves down. Put option: A put is an option contract giving the buyer the right to sell the stock. Certain options are shorterm in nature and are issued by investors another group of options are long-term in nature and are issued by companies.1 OPTIONS An option agreement is a contract in which the writer of the option grants the buyer of the option the right to purchase from or sell to the writer a designated instrument at a specific price within a specified period of time.2 OPTIONS TERMINOLOGY: Call option: A call is an option contract giving the buyer the right to purchase the stock. Strike price: It is the price at which the buyer of a option contract can purchase or sell the stock during the life of the option 16 .3.OPTIONS 3. 3. Expiration date: It is the date on which the option contract expires. Straddle: A straddle is combination of put and calls giving the buyer the right to either buy or sell stock at the exercise price. Spread: A spread consists of a put and a call option on the same security for the same time period at different exercise prices. Out of the money: The option is out of money if it not advantageous to exercise it. These are three possibilities. The option holder will exercise his option when doing so provides him a benefit over buying or selling the underlying asset from the market at the prevailing price. Strap: A strap is two calls and one put at the same strike price for the same period. 1. Writer: The term writer is synonymous to the seller of the option contract. 17 . 3. the option is said to be at the money. 2. Premium: Is the price the buyer pays the writer for an option contract. In the money: An option is said to be in the money when it is advantageous to exercise it. At the money: IF the option holder does not lose or gain whether he exercises his option or buys or sells the asset from the market. Strip: A strip is two puts and one call at the same period. Holder: The term holder is synonymous to the buyer of the option contract. A call option is a contract that gives its owner the right. but not the obligation.The exchanges initially created three expiration cycles for all listed options and each issue was assigned to one of these three cycles. July. A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price. 3. March. you can purchase 100 shares of Taser for $5 in the market and sell the shares to the option's writer for $10 each. Note that the maximum 18 . For example. 3. August. if you have one Mar 09 Taser 10 put. An American call option can be exercised on or before the specified date only. January. and December. October. June.4 CALL OPTION: An option that grants the buyer the right to purchase a designated instrument is called a call option. but not the obligation. you have the right to sell 100 shares of Taser at $. to sell a specified amount of an underlying security at a specified price within a specified time. all the F and O contracts whether on indices or individual stocks are available for one or two or three months series and they expire on the Thursday of the concerned month. to buy a specified price on or before a specified date. European options can be exercised on the specified date only. September.5 PUT OPTION: An option contract giving the owner the right. November. If shares of Taser fall to $5 and you exercise the option.10 until March 2008 (usually the third Friday of the month). In India. which means you make $500 (100 x ($10-$5)) on the put option. March. which gives the holder the right to buy shares. April. February. This is the opposite of a call option. 19 .6 FACTORS DETERMINIG OPTION VALUE: Stock price Strike price Time to expiration Volatility Risk free interest rate Dividend 3. This gives the call option holder until the Expiry day to decide whether or exercised the option and buys the shares.7 Advantages of option trading: Risk management: put option allow investors holding shares to hedge against a possible fall in their value. This can be considered similar to taking out insurance against a fall in the share price. Likewise the taker of a put option has time to decide whether or not to sell the shares.amount of potential proft in this example ignores the premium paid to obtain the put option. 3. Time to decide: By taking a call optionthe purchase price for the shares is locked in. If investor expects the market to rise. they may decide to buy call options. they may decide to buy put options. Speculations: The ease of trading in and out of option position makes it possible to trade options with no intention of ever exercising them. If expecting a fall. Leverage: Leverage provides the potential to make a higher return from a smaller initial outlay than investing directly however leverage usually involves more risks than a direct investment in the underlying share. Trading options has a lower cost than shares. Trading in options can allow investors to benefit from a change in the price of the share without having to pay of the share. Either way the holder can sell the option prior to expiry to take a profit or limit a loss. 20 . as there is no stamp duty payable unless and until options are exercised. 2011. When to Use: Investor is very bullish on the stock / index. The underlying asset can be a stock or index (in stock market). HEDGING STRATEGIES STRATEGY 1: LONG CALL Long Call is one of the basic strategy which is been used by newbie or first time investors using option strategies to either speculate on market or hedge their holdings. which will be his maximum loss. call option will expire worthless.5100 at a premium of Rs. expiring on 26th May. In case index stays at or fall below 5100. In other words. it means that you are bullish and expect the underlying asset to rise with a limited downside risk. Reward: Unlimited Breakeven: Strike Price + Premium Example: Suppose Prem is bullish on Index on 14th April. 21 . Long Call option strategy basically involves buying a call option.4. When you buy a call option. (Maximum loss if market expires at or below the option strike price). If index goes above 5140. 2011 when the index was trading at 4900 and he buys a call option with a strike price of Rs. Prem will make a net profit (after deducting premium he paid) on exercising the option. he has to forgo the premium he paid to buy the call option.40. Risk: Limited to the Premium. e. Strategies 2: Synthetic Long Call Option Strategy Synthetic Long Call Option Strategy provides an insurance against the price fall which can be used to reduce the potential loss. you can exercise the put option. In case. the breakeven is achieved when index moves above Rs. In Synthetic Long Call Strategy. the stock price fall. you have capped the potential loss because Put option stops your further loss. Rs.e.e. As the stock price or index rises the Long Call moves into profit more and more quickly. In this manner. 5140 (strike price + Premium = 5100 + 40 = 5140). you get benefited from the price rise and in case. the stock price rises. Long Call option strategy limits the downside risk to the amount of premium paid by Prem i. Prem has to wait till market moves above 5140. Out-themoney strike price). But the upside potential and profit is unlimited in case the index rise above the breakeven point. The major question at this moment is what should be the strike price of Put option to make this strategy work? The strike price should be the price at which you brought the stock (i.40. A Long Call option is the easiest and simplest way to benefit if you believe that the market will make an upward move and is the most common choice among first time investors of Options. a trader buy stock from the cash market and a Put option of that stock from the future market.In the above example. In order to earn profit. 22 . At-the-money strike price) or slightly below the purchase price (i. It is a strategy which cap the potential loss and provide an opportunity to earn unlimited profit (after subtracting the Put premium) from stock price rise. 4000.When to Use Synthetic Long Call Option Strategy: An investor or a trader having a conservatively bullish outlook on a stock can use Synthetic Long Call Strategy. Risk = Stock Price + Put Premium .8 23 . Maximum Loss: Maximum Loss = Stock Price + Put Premium – Put Strike =Rs4000 + Rs. Buy 100 July Put Options with a Strike Price of $3900 at a premium of $143. Buy 100 shares of the Stock at Rs.3900 =Rs. profit potential is unlimited. in case of adverse price movements. Breakeven: Breakeven for Synthetic Long Call = Put Premium + Stock Price Example: ABC Ltd.243. Is trading at Rs.e.Put Strike Price Reward of using this strategy is unlimited i.4000 on 4th July.80 – Rs.80 per put.143. Risk and Reward: The Maximum loss is equal to the losses limited to the stock price plus Put premium minus Put strike price. The investors who desire to have ownership in a stock but they are concerned about the near term outlook can use this strategy to limit the potential loss. ) From The Put (Rs.) 3400 3600 3800 4000 4143.80 -143.4143.80 -143. Breakeven Point: Breakeven = Put Premium + Stock Price =Rs.80 4200 4400 4600 4800 -600 -400 -200 0 143.80 + $4000 = Rs.20 456.80 The Payoff Schedule: ABC Ltd.20 -43.80 -243.20 256.80 -243.80 -143.143.Maximum Profit: As the stock price rises.80 -143. profit potential is unlimited.80 -143.80 0 56.80 -143. Payoff Payoff From Net Net Closes At ($) The Stock (Rs.80 200 400 600 800 356.20 156.20 656.80 -143.20 Payoff 24 .80 -243.) On Expirty Option (Rs. Risk: Limited to the amount of Premium paid. Reward: Unlimited Break-even Point: Stock Price .STRATEGY 3: LONG PUT Buying a Put is the opposite of buying a Call.) (Strike Price . 52.Premium) 2548 ANALYSIS: A bearish investor can profit from declining stock price by buying Puts. he can forego the option (it will expire worthless) with a maximum loss of the premium. When to use: Investor is bearish about the stock / index.) 2600 Mr. When an investor is bearish. XYZ will make a profit on exercising the option. he can buy a Put option. In case theNifty rises above 2600. To take advantage of a falling market an investor can buy Put options. He limits his risk to the amount of premium paid but his profit potential remains unlimited. 2600 at a premium of Rs.Premium Example: Mr. when the Nifty is at 2694. This is one of the widely used strategy when an investor is bearish. A long Put is a Bearish strategy.) 52 Break Even Point (Rs. 25 . expiring on 31st July. XYZ Pays Premium (Rs. A Put Option gives the buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and thereby limit his risk. He buys a Put option with a strike price Rs. XYZ is bearish on Nifty on 24th June. (Maximum loss if stock / index expires at or above the option strike price). Strategy :Buy Put Option Current Nifty index 2694 Put Option Strike Price (Rs. Mr. When you buy a Call you are bullish about the stock / index. If the Nifty goes below 2548. the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike. SELL CALL OPTION A bull call spread is constructed by buying an in-the-money (ITM) call option. Reward: Limited to the difference between the two strikes minus net premium cost. Risk: Limited to any initial premium paid in establishing the position.05 Break Even Point (Rs.) 35.) 170.) 4400 Mr.STRATEGY 4. XYZ Receives Premium (Rs. and selling another out-of-the-money (OTM) call option. Maximum profit occurs where the underlying rises to the level of the higher strike or above Break-Even-Point (BEP): Strike Price of Purchased call+ Net Debit Paid Example: Strategy :Buy a Call with a lower strike (ITM) +Sell a Call with a higher strike (OTM) Nifty index Current Value 4191. the investor makes the maximum profit.)4235.) 135.05 26 . This strategy is exercised when investor is moderately bullish to bullish. The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long Call) Strategy.10 Buy ITM Call Option Strike Price (Rs. When to Use: Investor is moderately bullish. Both calls must have the same underlying security and expiration month. Often the call with the lower strike price will be in-the-money while the Call with the higher strike price is out-of-the-money. XYZ Pays Premium (Rs. Maximum loss occurs where the underlying falls to the level of the lower strike or below. because the investor will make a profit only when the stock price / index rises.) 4100 Mr.45 Sell OTM Call Option Strike Price (Rs. If the stock price falls to the lower (bought) strike. BULL CALL SPREAD STRATEGY: BUY CALL OPTION.40 Net Premium Paid (Rs. Let us try and understand this with an example. A long butterfly is similar to a Short Straddle except your losses are limited. 4150 strike price Call was purchased the loss would have been Rs. The investor is looking to gain from low volatility at a low cost. Reward Difference between adjacent strikes minus net debit 27 . The maximum reward in this strategy is however restricted and takes place when the stock / index is at the middle strike at expiration. STRATEGY 5 : LONG CALL BUTTERFLY: SELL 2 ATM CALL OPTIONS.45). reduced the cost of the trade (if only the Rs. The strategy offers a good risk / reward ratio. the strategy also has limited gains and is therefore ideal when markets are moderately bullish.45). 170. When to use: When the investor is neutral on market direction and bearish on volatility.e. and buying 1 OTM Call options (there should be equidistance between the strike prices).45 i. The maximum losses are also limited. reduced the loss on the trade (if only the Rs. BUY 1 ITM CALL OPTION AND BUY 1 OTM CALL OPTION. Risk Net debit paid. together with low cost. the premium of the Call purchased). buying 1 ITM Call. 4100 strike price Call was purchased the cost of the trade would have been Rs. The strategy can be done by selling 2 ATM Calls. 170. Let us see an example to understand the strategy.The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs. However. 4270. 4100 strike price Call was purchased the breakeven point would have been Rs. The result is positive incase the stock / index remains range bound. A Long Call Butterfly is to be adopted when the investor is expecting very little movement in the stock price / index. 141. The Short Call Butterfly can be constructed by Selling one lower striking in-the-money Call. The maximum profit occurs if the stock finishes on either side of the upper and lower strike prices at expiration.Break Even Point: Upper Breakeven Point =Strike Price of Higher Strike Long Call – Net Premium Paid Lower Breakeven Point =Strike Price of Lower Strike Long Call + Net Premium Paid Example: Nifty is at 3200. giving the investor a net credit (therefore it is an income strategy). Let us understand this with an example. However.55 and buys 1 OTM Nifty Call Option with a strike price of Rs.e. this strategy offers very small returns when compared to straddles. bullish and bearish. STRATEGY 6 : SHORT CALL BUTTERFLY: BUY 2 ATM CALL OPTIONS. When to use: You are neutral on market direction and bullish on volatility. There should be equal distance between each strike. 97. SELL 1 ITM CALL OPTION AND SELL 1 OTM CALL OPTION. XYZ expects very little movement in Nifty. The maximum risk occurs if the stock / index is at the middle strike at expiration. The resulting position will be profitable in case there is a big move in the stock / index. buys 1 ITM Nifty Call Option with a strike price of Rs. buying two at-the-money Calls and selling another higher strike out-of-the-money Call. Mr. which is a range bound strategy. 3100 at a premium of Rs.90 each. 64. Neutral means that you expect the market to move in either direction . The Net debit is Rs.i.75. 9. 3300 at a premium of Rs. He sells 2 ATM Nifty Call Options with a strike price of Rs. 3200 at a premium of Rs. A Short Call Butterfly is a strategy for volatile markets. strangles with only slightly less risk. 28 . It is the opposite of Long Call Butterfly. XYZ expects large volatility in the Nifty irrespective of which direction the movement is. XYZ buys 2 ATM Nifty Call Options with a strike price of Rs.75.) 3109.75 29 .55 Sells 1 OTM Call Option Strike Price (Rs. 3300 at a premium of Rs. 64. 97. XYZ pays Premium (Rs.) 3100 Mr.80 Sells 1 ITM Call Option Strike Price (Rs.) 3200 Mr.) 141. STRATEGY BUY 2 ATM CALL OPTIONS.) 3300 Mr. Mr. XYZ receives Premium (Rs.Risk Limited to the net difference between the adjacent strikes (Rs. XYZ receives Premium (Rs.25 Break Even Point(Lower) (Rs.55 and sells 1 OTM Nifty Call Option with a strike price of Rs. 100 in this example) less the premium received for the position. sells 1 ITM Nifty Call Option with a strike price of Rs. Mr. The Net Credit is Rs.) 195. Break Even Point: Upper Breakeven Point = Strike Price of Highest Strike Short Call Net Premium Received Lower Breakeven Point = Strike Price of Lowest Strike Short Call + Net Premium Received Example: Nifty is at 3200. SELL 1 ITM CALL OPTION AND SELL 1 OTM CALL OPTION.) 3290. 3100 at a premium of Rs. 141. upwards or downwards. Reward Limited to the net premium received for the option spread. 3200 at a premium of Rs. Nifty index Current Market Price 3200 Buy 2 ATM Call Option Strike Price (Rs.90 each. 9.) 64 Break Even Point (Upper) (Rs. 30 .