Developing a Risk Management Model for Option Contract: A Study of Auto Stock in India

Abstract

Risk is a characteristic feature of stock market in general and option market in particular. Indian option market has grown very fast during last one decade. According to report of SMC Global Securities, in financial year 2011 the volume generated by options market is almost two times that of the volumes generated in the cash market and futures market put together. The fact is that simply selecting best of the option strategies does not help investors to minimize risk. Therefore, due care should be taken while selecting strike price, expiration date and premium rates. So, investors need to develop risk management as well as risk analysis tool which is the key to limiting option risk. There are number of risk management and analysis tools available, which help investors to take wise investment decisions. One of the popular tools which is widely used by technical analyst is Exponential Moving Average Method (EMA) which helps to predict future movement in stock price. If the option investor uses technical analysis as a means to select option strategy and strike price then it possible to minimize risk and maximize profit on option trading. In the backdrop of this a study has been conducted to find out the relevance of Exponential Moving Average Method in Indian option market as means of risk management tool. The model developed by author has helped investor to book profit on all the sample companies.