Book & Study Material for Equity Derivatives

Bigmans Academy presents the Equity Derivatives course designed for individuals who are interested in gaining an in-depth understanding of equity derivative instruments and their practical application in investment strategies. This study material covers the essential concepts of equity derivatives, including options, futures, and other related products, and how to use these instruments to manage risk, leverage investment returns, and implement various trading strategies.

Equity derivatives are financial instruments whose value is derived from the price movements of underlying equity (stocks). They are essential tools for risk management, speculation, and arbitrage, and are widely used by both retail investors and institutional traders. This course is ideal for students, traders, and professionals who want to gain expertise in equity derivatives markets.

Contents of the Book & Study Material

1. Introduction to Equity Derivatives

• What are Equity Derivatives?: Understanding the concept of equity derivatives as financial contracts whose value is based on the underlying stock or index.

• Types of Equity Derivatives:

  • Futures: A standardized contract to buy or sell an underlying asset (stock/index) at a predetermined price on a specified date.

  • Options: Contracts that give the holder the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at a predetermined price before or on a specified date.

  • Equity Swaps: Agreements where two parties exchange the return on an equity portfolio for a fixed income or another equity return.

2. Futures Contracts and Trading

• Understanding Futures Contracts: Detailed explanation of futures contracts, their structure, and how they function in equity derivatives markets.

  • Long vs. Short Positions: Difference between taking a long position (buying a future) and a short position (selling a future).

  • Margin Requirements: Understanding initial margin, maintenance margin, and how margins are calculated and adjusted.

• Futures Market Participants: Identifying the role of hedgers, speculators, and arbitrageurs in the equity futures market.

• Cash and Carry Arbitrage: Explaining the strategy of taking advantage of discrepancies between the spot and futures markets.

• Pricing of Futures Contracts: Understanding the factors affecting the pricing of futures contracts, including interest rates, dividends, and spot prices.

3. Options Contracts and Strategies

• Understanding Options: Detailed explanation of call options (right to buy) and put options (right to sell).

  • Strike Price, Expiry Date, and Premium: How these components influence the value of options.

  • In-the-money (ITM), At-the-money (ATM), and Out-of-the-money (OTM): Classification of options based on their intrinsic value.

• Option Pricing Models:

  • Black-Scholes Model: Introduction to the Black-Scholes model for pricing European-style options.

  • Binomial Model: A simplified model for pricing options using a discrete time framework.

  • Greeks: Understanding Delta, Gamma, Vega, Theta, and Rho—key factors that influence option prices.

• Types of Options Strategies:

  • Covered Calls: A strategy to generate income by writing (selling) call options on owned stocks.

  • Protective Puts: Using put options to hedge against downside risk in an equity position.

  • Straddles and Strangles: Strategies to profit from volatility by holding both call and put options on the same stock.

  • Spreads: Using two or more options positions to reduce risk, including vertical spreads, horizontal spreads, and diagonal spreads.

4. Advanced Option Strategies

• Iron Condor: A strategy combining a bull put spread and a bear call spread to generate income when the stock is expected to remain in a defined range.

• Butterfly Spread: A strategy to profit from low volatility where you combine a long position and two short positions at different strike prices.

• Calendar Spread: A strategy using options with different expiration dates, designed to profit from differences in time decay.

• Ratio Call Writing: Writing more calls than the number of underlying shares owned, generating premium income but exposing the trader to risk if the price of the stock rises sharply.

• Protective Collar: A strategy where an investor holds a long position in the stock, buys a protective put, and simultaneously writes a call option to reduce the cost of the put.

5. Pricing and Valuation of Equity Derivatives

• Intrinsic and Time Value of Options: How to differentiate between intrinsic value (the difference between the stock price and strike price) and time value (the additional value due to time until expiration).

• Implied Volatility: The market’s view of future volatility, which is inferred from option prices.

• Historical vs. Implied Volatility: Comparing the volatility of the underlying asset based on past price movements versus current market expectations.

• Volatility Smile and Skew: Analyzing patterns in implied volatility across different strike prices and expiration dates.

• Option Greeks and Their Impact: Understanding how changes in market conditions (like stock price movements and time decay) affect options through the use of Delta, Gamma, Vega, Theta, and Rho.

6. Risk Management Using Equity Derivatives

• Hedging with Futures: Using equity futures contracts to hedge against price movements in the underlying stocks or portfolios.

• Hedging with Options: How to use options to protect an existing portfolio from price declines (e.g., protective puts) or to lock in profits (e.g., covered calls).

• Portfolio Protection with Derivatives: Using equity derivatives to protect the overall portfolio, especially in volatile markets.

• Risk-Return Tradeoff in Equity Derivatives: Analyzing how derivatives can adjust the risk-return profile of a portfolio and help achieve specific investment objectives.

• Leverage and Margin: Understanding the impact of leverage in equity derivatives trading and how margin requirements can amplify both profits and losses.

7. Arbitrage in Equity Derivatives

• Arbitrage Strategies: Techniques used to exploit price discrepancies between different markets or instruments.

  • Futures Arbitrage: Taking advantage of differences in the futures price and the spot price of an underlying asset.

  • Options Arbitrage: Arbitrage opportunities arising from mispricing between options of different strikes or expiry dates.

  • Convertible Arbitrage: Exploiting pricing inefficiencies in convertible bonds and related equity derivatives.

• Risk in Arbitrage: Understanding the risks involved in arbitrage, including execution risk, market risk, and liquidity risk.

8. Regulatory Environment and Compliance in Equity Derivatives

• Regulations Governing Derivatives: An overview of SEBI’s guidelines for equity derivatives trading in India, including margin requirements, market manipulation rules, and trading limits.

• SEBI’s Role in Equity Derivatives Markets: The regulatory framework ensuring transparency and fair trading in equity derivatives markets.

• Derivatives Clearing and Settlement: Understanding how clearing houses facilitate the settlement of derivatives contracts and the role of margining in reducing counterparty risk.

• Global Regulations and Standards: A look at how equity derivatives markets are regulated globally (e.g., CFTC in the US, ESMA in Europe).

9. Equity Derivatives and Their Applications in Portfolio Management

• Using Derivatives for Portfolio Diversification: How to use equity derivatives to diversify a portfolio by adding exposure to different asset classes or reducing concentration risk.

• Equity Derivatives for Speculation: Using options and futures to speculate on the future direction of stock prices, volatility, or market indices.

• Tactical Asset Allocation: How to use derivatives for adjusting asset allocations based on market outlook or short-term opportunities.

• Risk-Adjusted Returns: Using equity derivatives to optimize risk-adjusted returns, including the use of options for tail-risk hedging.

10. Case Studies and Practical Applications

• Real-Life Examples of Hedging with Equity Derivatives: How investors and institutions use futures and options in practice to manage portfolio risk.

• Analyzing Volatility Using Options Strategies: Case studies on how traders use options to profit from market volatility, including earnings reports, geopolitical events, and macroeconomic announcements.

• Arbitrage in Action: Practical examples of arbitrage strategies using equity derivatives.

• Regulatory Compliance in Derivatives Trading: Case studies of regulatory breaches and how compliance with market regulations is enforced.

Course Format and Delivery

• eBooks and PDFs: Comprehensive study materials and textbooks available for download.

• Video Lessons: In-depth video tutorials to explain complex concepts in a simplified manner.

• Live Webinars and Q&A Sessions: Live interactive sessions where instructors address questions and explain difficult topics in real-time.

• Assessments and Quizzes: Regular quizzes and assignments to test your understanding of equity derivatives.

• Practical Demonstrations: Real-time simulations of trading strategies using equity derivatives, allowing students to practice in a risk-free environment.

Additional Support

• Expert Mentorship: Direct support from experienced derivatives traders and financial experts to guide you through difficult topics.

• Discussion Forums: An online community where students can interact, share knowledge, and discuss different aspects of equity derivatives trading.

• Certification of Completion: Upon successful completion of the course, students will receive a certificate confirming their proficiency in equity derivatives.