Emerging financial derivatives in India: An empirical study of equity/stock market (NSE India)

Index futures were introduced by the National Stock Exchange (NSE) in June 2000. Derivative securities are considered as additional means for informed traders to trade on their information. Derivatives may not only lead the underlying assets in imparting information, they may also provide information that simply cannot be inferred from the markets in underlying assets. Several stock only and stock plus options directional trading strategies are then considered after comparing the predicted stock price at maturity and the actual stock price at the trade initiation date. This paper examines the role of options market open interest in conveying information about the future movement of the underlying asset. This study uses daily closing data on NSE (National Stock Exchange of India) options of 30 stocks during January-April 2015, to investigate whether options open interest contains information that can be used for trading purposes. Individual stock price at option maturity is first predicted based on the distribution of options open interest.