Is Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?

Is Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?

James Varghese

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Dr. Babu Jose

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1 St. Thomas College, Palai

GJMBR Volume 20 Issue B4

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Investments are essential as the growth of the stock market denoted through increased investments results in the growth of the economy. But they are always subject to various risks in the market. These risks are to be mitigated for the development of an efficient economic system by the market itself. Apart from the stock segment, the Indian financial market is a home for futures and options segments that facilitate the hedging of risks involved in the investments. For considering any derivative market as a hedging tool, one of the prerequisites is the presence of integration between such derivative market and its underlying market. The present study focuses on testing the relationship between Indian stock market and the options market, represented by NSE Nifty 50 index and index options on it respectively, to know whether the options segment is suitable for hedging the risks implicit with investments in the stock market, with substantial consideration to payoff structure of the market denoted by different moneyness groups viz.

60 Cites in Articles

References

K Ahn,Y Bi,S Sohn (2018). Price discovery among SSE 50 Index-based spot, futures and options markets.
Maria Amadori,Lamia Bekkour,Thorsten Lehnert (2014). The relative informational efficiency of stocks, options and credit default swaps during the financial crisis.
Kaushik Amin,Charles Lee (1997). Option Trading, Price Discovery, and Earnings News Dissemination*.
Manuel Ammann,Silvan Herriger (2002). Relative Implied-Volatility Arbitrage with Index Options.
J Anthony (1988). The Interrelation of Stock and Options Market Trading -Volume Data.
G Bakshi,C Cao,Z Chen (2000). Do Call Prices and Underlying Stock Always Move in the Same Direction.
Turan Bali,Armen Hovakimian (2009). Volatility Spreads and Expected Stock Returns.
G Baltussen,B Grient,W Groot,E Hennink,W Zhou (2012). Exploiting Option Information in the Equity Market.
A Bhat,K Arekar (2016). Empirical performance of Black -Scholes and GARCH option pricing models during turbulent times: The Indian evidence.
Mihir Bhattacharya (1987). Price Changes of Related Securities: The Case of Call Options and Stocks.
F Black,M Scholes (1972). The Valuation of Option Contracts and a Test of Market Efficiency.
F Black,M Scholes (1973). The Pricing of Options and Corporate Liabilities.
G Booth,R So,Y Tse (1999). Price Discovery in the German Equity Index Derivatives.
G Booth,Raymond So,Yiuman Tse (1999). Price discovery in the German equity index derivatives markets.
P Boyle,S Byoun,H Park (2002). The Lead Lag Relationship between Spot and Option Markets and Implied Volatility in Option Prices.
S Byoun,H Park,K Chan,Y Chung,H Johnson (1993). Arbitrage Opportunities and Efficiency of an Option Market in 21.
Kee Chung,Seongkyu Park,Doojin Ryu (2016). Trade duration, informed trading, and option moneyness.
C Conover,D Peterson (1999). The Lead Lag Relationship between the Option and Stock Markets Prior to Substantial Earnings Surprises and the Effect of Security Regulation.
K Cremers,Ruslan Goyenko,Paul Schultz,Stephen Szaura (2019). Informed Trading of Options, Option Expiration Risk, and Stock Return Predictability.
S Debasish (2009). An econometric analysis of the lead-lag relationship between India's NSE Nifty and its derivative contracts.
M Dicle,A Beyhan,L Yao (2010). Market Efficiency and International Diversification: Evidence from India.
Alok Dixit,Surendra Yadav (2010). Informational efficiency of implied volatilities of S&P CNX Nifty index options.
Alok Dixit,Surendra Yadav,P Jain (2009). Violation of lower boundary condition and market efficiency: An investigation into the Indian options market.
Brian Du,Scott Fung (2018). Directional information effects of options trading: Evidence from the banking industry.
David Easley,Maureen O'hara,P Srinivas (1998). Option Volume and Stock Prices: Evidence on Where Informed Traders Trade.
E Fama (1970). Efficient Capital Markets: A Review of Theory and Empirical Work.
Jeff Fleming,Barbara Ostdiek,Robert Whaley (1996). Trading costs and the relative rates of price discovery in stock, futures, and option markets.
Rakesh Gupta,Parikshit Basu (2007). Weak Form Efficiency In Indian Stock Markets.
C Harvey,R Whaley (1992). Market Volatility Prediction and the Efficiency of the S&P 100 Index Option Market.
J Hasbrouk (1995). One Security, Many Markets: Determining the Contributions to Price Discovery.
S Hentze,M Seiler (2000). An Examination of the Lead / Lag Relationship Between the Option Market and the Stock Market: Where Do We Stand.
Richard Holowczak,Yusif Simaan,Liuren Wu (2007). Price Discovery in the U.S. Stock and Stock Options Markets: A Portfolio Approach.
J Hull,S Basu (2016). Options, Futures and Other Derivatives.
Priyanka Jain,Vishal Vyas,Ankur Roy (2013). A study on weak form of market efficiency during the period of global financial crisis in the form of random walk on Indian capital market.
George Jiang,Yisong Tian (2011). A random walk down the options market.
Dr. Joshi (2012). Testing Market Efficiency of Indian Stock Market.
A Khan,S Ikram,M Mehtab (2011). Testing Weak form Market Efficiency of Indian Capital Market: A Case of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Sol Kim,In Joon Kim,Seung Oh Nam (2009). The lead‐lag relationship between stock index options and the stock index market.
Raman Kumar,Atulya Sarin,Kuldeep Shastri (1995). The impact of index options on the underlying stocks: The evidence from the listing of Nikkei Stock Average options.
L Caralla,P Mammola (2000). Empirical Tests of Efficiency of the Italian Index Options Market.
Gianluca Cassese,Massimo Guidolin (2004). Pricing and Informational Efficiency of the MIB30 Index Options Market. An Analysis with High‐frequency Data.
Sugato Chakravarty,Huseyin Gulen,Stewart Mayhew (2004). Informed Trading in Stock and Option Markets.
K Chan,Y Chung,W.-N Fong (2002). 1049-1075. its Initial Stage: The Case of KOSPI 200 Options in Korea.
Steven Manaster,Richard Rendleman (1982). Option Prices as Predictors of Equilibrium Stock Prices.
Khelifa Mazouz,Yuliang Wu,Shuxing Yin (2015). Trading Activity in Options and Stock Around Price‐Sensitive News Announcements.
Dr. Mukherjee,R Mishra (2004). Impact of Open Interest and Trading Volume in Option Market on Underlying Cash Market: Empirical Evidence from Indian Equity option Market.
C Oprean (2012). Testing the Financial Market Informational Efficiency in Emerging States.
Ging-Ginq Pan,Yung-Ming Shiu,Tu-Cheng Wu (2014). The Effects of Stochastic Volatility and Demand Pressure on the Monotonicity Property Violations.
Fei Ren,Shen-Dan Ji,Mei-Ling Cai,Sai-Ping Li,Xiong-Fei Jiang (2019). Dynamic lead–lag relationship between stock indices and their derivatives: A comparative study between Chinese mainland, Hong Kong and US stock markets.
D Ryu (2015). The information content of trades: An analysis of KOSPI 200 index derivatives.
Doojin Ryu (2016). Considering all microstructure effects: The extension of a trade indicator model.
Doojin Ryu,Heejin Yang (2017). Price disagreements and adjustments in index derivatives markets.
S Sehgal,N Vijayakumar (2008). Determinants of Implied Volatility Function on the Nifty Index Options Market: Evidence from India.
Imlak Shaikh,Puja Padhi (2013). On the Linkages among Ex-ante and Ex-post Volatility: Evidence from NSE Options Market (India).
Imlak Shaikh,Puja Padhi (2015). On the Relationship of Ex-ante and Ex-post Volatility: A Sub-period Analysis of S&P CNX Nifty Index Options.
Sandeep Srivastava (2004). Informational Content of Trading Volume and Open Interest - An Empirical Study of Stock Option Market in India.
N Stakic,A Jovancai,P Kapoor (2016). the Efficiency of the Stock Market in Serbia.
Jens Stephan,Robert Whaley (1990). Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets.
Heejin Yang,Hyung‐suk Choi,Doojin Ryu (2016). Option Market Characteristics and Price Monotonicity Violations.
H Yang,J Lee,D Ryu (2017). Market Depth, Domestic Investors and Price Monotonicity Violations.

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No external funding was declared for this work.

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The authors declare no conflict of interest.

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James Varghese. 2020. \u201cIs Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?\u201d. Global Journal of Management and Business Research - B: Economic & Commerce GJMBR-B Volume 20 (GJMBR Volume 20 Issue B4): .

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GJMBR Volume 20 Issue B4
Pg. 21- 32

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Crossref Journal DOI 10.17406/GJMBR

Print ISSN 0975-5853

e-ISSN 2249-4588

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GJMBR-B Classification: JEL Code: G19

Submission ReceivedNovember 5, 2020
RevisedNovember 5, 2020
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Accepted December 3, 2020
Published December 15, 2020

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60 Cites in Articles

References

K Ahn,Y Bi,S Sohn (2018). Price discovery among SSE 50 Index-based spot, futures and options markets.
Maria Amadori,Lamia Bekkour,Thorsten Lehnert (2014). The relative informational efficiency of stocks, options and credit default swaps during the financial crisis.
Kaushik Amin,Charles Lee (1997). Option Trading, Price Discovery, and Earnings News Dissemination*.
Manuel Ammann,Silvan Herriger (2002). Relative Implied-Volatility Arbitrage with Index Options.
J Anthony (1988). The Interrelation of Stock and Options Market Trading -Volume Data.
G Bakshi,C Cao,Z Chen (2000). Do Call Prices and Underlying Stock Always Move in the Same Direction.
Turan Bali,Armen Hovakimian (2009). Volatility Spreads and Expected Stock Returns.
G Baltussen,B Grient,W Groot,E Hennink,W Zhou (2012). Exploiting Option Information in the Equity Market.
A Bhat,K Arekar (2016). Empirical performance of Black -Scholes and GARCH option pricing models during turbulent times: The Indian evidence.
Mihir Bhattacharya (1987). Price Changes of Related Securities: The Case of Call Options and Stocks.
F Black,M Scholes (1972). The Valuation of Option Contracts and a Test of Market Efficiency.
F Black,M Scholes (1973). The Pricing of Options and Corporate Liabilities.
G Booth,R So,Y Tse (1999). Price Discovery in the German Equity Index Derivatives.
G Booth,Raymond So,Yiuman Tse (1999). Price discovery in the German equity index derivatives markets.
P Boyle,S Byoun,H Park (2002). The Lead Lag Relationship between Spot and Option Markets and Implied Volatility in Option Prices.
S Byoun,H Park,K Chan,Y Chung,H Johnson (1993). Arbitrage Opportunities and Efficiency of an Option Market in 21.
Kee Chung,Seongkyu Park,Doojin Ryu (2016). Trade duration, informed trading, and option moneyness.
C Conover,D Peterson (1999). The Lead Lag Relationship between the Option and Stock Markets Prior to Substantial Earnings Surprises and the Effect of Security Regulation.
K Cremers,Ruslan Goyenko,Paul Schultz,Stephen Szaura (2019). Informed Trading of Options, Option Expiration Risk, and Stock Return Predictability.
S Debasish (2009). An econometric analysis of the lead-lag relationship between India's NSE Nifty and its derivative contracts.
M Dicle,A Beyhan,L Yao (2010). Market Efficiency and International Diversification: Evidence from India.
Alok Dixit,Surendra Yadav (2010). Informational efficiency of implied volatilities of S&P CNX Nifty index options.
Alok Dixit,Surendra Yadav,P Jain (2009). Violation of lower boundary condition and market efficiency: An investigation into the Indian options market.
Brian Du,Scott Fung (2018). Directional information effects of options trading: Evidence from the banking industry.
David Easley,Maureen O'hara,P Srinivas (1998). Option Volume and Stock Prices: Evidence on Where Informed Traders Trade.
E Fama (1970). Efficient Capital Markets: A Review of Theory and Empirical Work.
Jeff Fleming,Barbara Ostdiek,Robert Whaley (1996). Trading costs and the relative rates of price discovery in stock, futures, and option markets.
Rakesh Gupta,Parikshit Basu (2007). Weak Form Efficiency In Indian Stock Markets.
C Harvey,R Whaley (1992). Market Volatility Prediction and the Efficiency of the S&P 100 Index Option Market.
J Hasbrouk (1995). One Security, Many Markets: Determining the Contributions to Price Discovery.
S Hentze,M Seiler (2000). An Examination of the Lead / Lag Relationship Between the Option Market and the Stock Market: Where Do We Stand.
Richard Holowczak,Yusif Simaan,Liuren Wu (2007). Price Discovery in the U.S. Stock and Stock Options Markets: A Portfolio Approach.
J Hull,S Basu (2016). Options, Futures and Other Derivatives.
Priyanka Jain,Vishal Vyas,Ankur Roy (2013). A study on weak form of market efficiency during the period of global financial crisis in the form of random walk on Indian capital market.
George Jiang,Yisong Tian (2011). A random walk down the options market.
Dr. Joshi (2012). Testing Market Efficiency of Indian Stock Market.
A Khan,S Ikram,M Mehtab (2011). Testing Weak form Market Efficiency of Indian Capital Market: A Case of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Sol Kim,In Joon Kim,Seung Oh Nam (2009). The lead‐lag relationship between stock index options and the stock index market.
Raman Kumar,Atulya Sarin,Kuldeep Shastri (1995). The impact of index options on the underlying stocks: The evidence from the listing of Nikkei Stock Average options.
L Caralla,P Mammola (2000). Empirical Tests of Efficiency of the Italian Index Options Market.
Gianluca Cassese,Massimo Guidolin (2004). Pricing and Informational Efficiency of the MIB30 Index Options Market. An Analysis with High‐frequency Data.
Sugato Chakravarty,Huseyin Gulen,Stewart Mayhew (2004). Informed Trading in Stock and Option Markets.
K Chan,Y Chung,W.-N Fong (2002). 1049-1075. its Initial Stage: The Case of KOSPI 200 Options in Korea.
Steven Manaster,Richard Rendleman (1982). Option Prices as Predictors of Equilibrium Stock Prices.
Khelifa Mazouz,Yuliang Wu,Shuxing Yin (2015). Trading Activity in Options and Stock Around Price‐Sensitive News Announcements.
Dr. Mukherjee,R Mishra (2004). Impact of Open Interest and Trading Volume in Option Market on Underlying Cash Market: Empirical Evidence from Indian Equity option Market.
C Oprean (2012). Testing the Financial Market Informational Efficiency in Emerging States.
Ging-Ginq Pan,Yung-Ming Shiu,Tu-Cheng Wu (2014). The Effects of Stochastic Volatility and Demand Pressure on the Monotonicity Property Violations.
Fei Ren,Shen-Dan Ji,Mei-Ling Cai,Sai-Ping Li,Xiong-Fei Jiang (2019). Dynamic lead–lag relationship between stock indices and their derivatives: A comparative study between Chinese mainland, Hong Kong and US stock markets.
D Ryu (2015). The information content of trades: An analysis of KOSPI 200 index derivatives.
Doojin Ryu (2016). Considering all microstructure effects: The extension of a trade indicator model.
Doojin Ryu,Heejin Yang (2017). Price disagreements and adjustments in index derivatives markets.
S Sehgal,N Vijayakumar (2008). Determinants of Implied Volatility Function on the Nifty Index Options Market: Evidence from India.
Imlak Shaikh,Puja Padhi (2013). On the Linkages among Ex-ante and Ex-post Volatility: Evidence from NSE Options Market (India).
Imlak Shaikh,Puja Padhi (2015). On the Relationship of Ex-ante and Ex-post Volatility: A Sub-period Analysis of S&P CNX Nifty Index Options.
Sandeep Srivastava (2004). Informational Content of Trading Volume and Open Interest - An Empirical Study of Stock Option Market in India.
N Stakic,A Jovancai,P Kapoor (2016). the Efficiency of the Stock Market in Serbia.
Jens Stephan,Robert Whaley (1990). Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets.
Heejin Yang,Hyung‐suk Choi,Doojin Ryu (2016). Option Market Characteristics and Price Monotonicity Violations.
H Yang,J Lee,D Ryu (2017). Market Depth, Domestic Investors and Price Monotonicity Violations.

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