Effectiveness of Options Trading Strategies in India

Abstract

There have been significant developments in the securities market in India during the past few years particularly with the introduction of derivative products. With the derivatives market now about eight years old, it would be appropriate to study the performance of options trading strategies in India. Hence this study compares the performance of Butterfly, Straddle, Strip and Strap strategies with the simple buy & hold strategy in the Indian context for a sample of 15 stocks each over the period Feb 2007-Mar 2008. The results show that Strap strategy is not at all working in Indian options market, Straddle and Strip strategies are not working in case of one month and two months period contracts. However the result is inconclusive in case of three months period contracts. Butterfly spread is not working when the contract period is two months and three months but is neutral in case of one month period contracts. When compared to simple buy & hold strategy, the analysis reveals that buy & hold strategy, in case of highly volatile stocks, is neutral in case of one month period contracts. However the result is inconclusive in case of two months and three months period contracts. In case of least volatile stocks, buy & hold strategy is giving inconclusive results in Indian context over different time periods. On the whole, buy & hold strategy has performed better than various options trading strategies over the study period.