Undercurrents of Options Trading

Abstract

Large amount of trading has let the market become volatile, leading to the emergence of volatility instruments in the market to safeguard the risk-averse investors against uncertainties arising out of volatility in asset prices. The basic idea of this paper is to see the effect of VIX, which is a volatility index based on the index option prices; the Index Option (Nifty Option Contracts), whose underlying is an index (Nifty) comprising of many stocks; and the underlying index Nifty, which captures the behavior of the overall equity market. The combined effect of these three indices on open interest, which tells the number of outstanding contracts that exist for a particular stock at the end of the trading day, is studied using Structural Equation Modeling (SEM). The study used NSE data for a period of three years from March 2009 to February 2012. The outcome of the study will aid in understanding the indicators of options market in a better way.