1. Options Strategies for a Volatile Market (Total Marks 60 marks)

Meghna, a trader employed at Wellvet Partners, a provider of financial services, had the task of devising and executing option strategies tailored for unpredictable markets. Collaborating with Aruna, a seasoned Senior Options Strategist, they devised a plan to leverage Nifty March 2020 options for executing these strategies amidst market volatility. During the final week of February, India's VIX (Volatility Index), an indicator of stock return volatility traded on the NSE, experienced a surge of 70%. This surge bolstered Meghna's conviction in the market's volatility, anticipating Nifty to exhibit a movement of at least 10% in either direction throughout March 2020. Nevertheless, Aruna cautioned Meghna about the potential for market stability and advised her to assign equal probabilities to both volatile and stable market scenarios when selecting an option strategy.

Although this scenario is contextualized within the context of the COVID-19 pandemic outbreak in February and March 2020, its relevance extends to any period characterized by market volatility. The analysis employs the NIFTY index from the National Stock Exchange of India to elucidate pertinent principles. Furthermore, the principles deliberated herein are equally applicable to options linked with various underlying assets such as commodities, currencies, bonds, and more

ASSIGNMENT QUESTIONS

1. How do options strategies differ from speculation using options? (6 marks)

2. What option strategies are useful/profitable under the assumption of volatile market

conditions?