Institutional Objectives in Options Trading🎯 1. Hedging Large Portfolios
One of the primary institutional goals is to protect investments from unfavorable market movements. Since institutions hold large quantities of stocks, they face massive risk if the market turns against them.
✅ Example:
A mutual fund holding ₹100 crore worth of Nifty 50 stocks might buy Put Options on Nifty to protect against a market crash.
This acts like insurance — a small premium is paid to avoid a huge loss.
🔹 This is called a protective put strategy.
📈 2. Generating Additional Income
Institutions also use options to generate consistent income. Since they often hold large amounts of shares, they can write (sell) options against these positions.
✅ Example:
Selling Covered Calls against stock holdings generates premium income, especially when expecting the market to remain sideways.
Writing Cash-Secured Puts allows them to earn premium while preparing to buy a stock at a lower price.
🔹 This enhances portfolio returns without needing to sell the core holdings.
📉 3. Managing Volatility Exposure
Volatility is a double-edged sword. Institutions analyze and trade implied volatility (IV) rather than just direction. They adjust their portfolios using options to profit from volatility changes or to reduce risk when volatility spikes.
✅ Common practices:
Use straddles and strangles before major events like earnings or elections.
Buy options when IV is low (expecting a spike) and sell options when IV is high (expecting it to drop).
🔹 This is called volatility arbitrage or vega trading.
🔁 4. Portfolio Adjustment and Rebalancing
Institutions use options to rebalance exposure without triggering capital gains taxes or disturbing existing stock positions.
✅ Example:
Instead of selling shares, an institution might:
Buy puts to reduce downside risk.
Sell calls to lock in profits.
Use spreads or collars to control price bands of risk/reward.
🔹 This helps in making tactical moves without liquidating long-term holdings.
💡 5. Directional Bets With Limited Risk
Though not their primary objective, institutions sometimes make directional bets using options for leveraged exposure, with defined risk.
✅ Example:
If a fund expects a strong upside in a stock, it might buy call options instead of the stock itself.
This reduces capital requirement and limits downside to the premium paid.
🔹 This is common in event-driven trading, such as earnings, mergers, or regulatory announcements.
🔄 6. Capital Efficiency
Institutions are under constant pressure to manage capital efficiently. Buying or selling options allows them to control larger positions with less money, keeping more capital available for other trades.
✅ Example:
Instead of buying 1,00,000 shares of a company, they might buy deep ITM call options to replicate stock movement with lower capital.
🔹 This is known as synthetic long exposure.
⚖️ 7. Risk Transfer and Insurance
Options allow institutions to transfer market risk to willing counterparties. They use customized derivatives or listed options to insure specific risks, such as:
Currency risk
Interest rate risk
Commodity price risk
Equity drawdowns
🔹 Large institutions like banks and insurance firms use over-the-counter (OTC) options for complex hedging.
🛠️ 8. Complex Strategy Execution
Institutions often use multi-leg strategies for market-neutral setups or for fine-tuned payoff structures. These include:
Iron Condors
Butterfly Spreads
Calendar/Diagonal Spreads
Box Spreads
Delta-neutral gamma scalping
🔹 These allow fine control over expected profits and losses, based on volatility, time decay, and price movement.
