How to make money by writing CALL option just before exiry

[abhinkoi]

Hello All,

I have been trading options for last 6 months and whatever I have earned is just by buying a call and selling it after getting a proper premium.

I have been hearing something called TIME DECAY which means that as soon as expiry comes the premium of a CALL option does rise as much as underlying. Meaning if Nifty 3000 CALL premium was at 90 whe Nifty was at 2900 and the days left in exipry are 15, it would be very less like 40 or 50 when the expiry reaches and even Nifty crosses 3000.

I hope all the Senior members understand what I am trying to say but for all new bies it may be a difficult task to understand for the time being.

What my query is "can someone tell everyone a strategy how to make money by writing a CALL option before expiry". Because the bottom line is 80% of the contracts expire worthless and I want to cash from this line.


Please help for the benefit of all.
If I miss on anything I would request Senior members to clear the query on my behalf.

Thanks a ton in advance

Regards
Abhinav

 

[Agilent]

Yes Abhinav.... yr strategy is not new... many of us think the same way.

The skill lies in picking the strike price. I would recommend an out of the money call, say 3200 or 3250 (June), where the bid/offer spreads are low, AND which are likely to remain out of the money at expiry (29th June) ... hence would expire worthless

Remember you will have to provide hefty margins, to avoid an automatic square off before expiry (which brokerage do u deal thru' ?).

The risk is a sudden bullish surge over the next 3 days ... causing nifty to breach 3200 or 3250 (as applicable), and that's where your judgment comes in

Good luck

AGILENT

 

[abhinkoi]

Thanks for the reply Agilent.
Can you please explain me with an example -

Lets say Nifty is at 3039 right now and June 3100 CALL is at 27 and June 3000CALL is at 72

Now I want to understand the risk involve in both the conditions mentioned below -

1) I sell June 3100 CALL at 27. So what would be the breakeven point and from what level of Nifty spot my loss would be started? I.e I already have Rs. 27 as premium in my pocket. Would it be when Nifty crosses 3027

2) I sell June 3000 CALL at 72. So what would be the breakeven point and from what level of Nifty spot my loss would be started? I.e I already have Rs. 72 as premium in my pocket. Would it be when Nifty crosses 3072?

Please help.

 

[Agilent]

Thanks for the reply Agilent.
Can you please explain me with an example -

Lets say Nifty is at 3039 right now and June 3100 CALL is at 27 and June 3000CALL is at 72

Now I want to understand the risk involve in both the conditions mentioned below -

1) I sell June 3100 CALL at 27. So what would be the breakeven point and from what level of Nifty spot my loss would be started? I.e I already have Rs. 27 as premium in my pocket. Would it be when Nifty crosses 3027

2) I sell June 3000 CALL at 72. So what would be the breakeven point and from what level of Nifty spot my loss would be started? I.e I already have Rs. 72 as premium in my pocket. Would it be when Nifty crosses 3072?

Please help.

Abhinav
As long as Nifty closes <3100 on 29 June, the 3100 call will expire worthless, hence your profit will be 27 (less brokerage)

I'm not able to tell u how much Nifty 3000 call will trade at if and when NIfty is at 3072. In any case this call will still have some value, and you could end up with a loss when u square off

Suggest you get some other experts (Vince ?) to corroborate, and don't go by my advice alone. FnO option sales can be tricky matters. But I would reiterate : go for well out-of-the money calls, of u r looking to sell. Dont get tempted by the pricier in-the-money calls.

AGILENT

 

[abhinkoi]

Thanks a ton Agilent for your valueable advice. I am convinced pretty much.
I would try to explore more pros n cons of this from other peer members as well.

You have a great day !!!

 

[Agilent]

Thanks a ton Agilent for your valueable advice. I am convinced pretty much.
I would try to explore more pros n cons of this from other peer members as well.

You have a great day !!!

You are welcome .

Must share with you : I got inspired by your post and sold a small lot of Nifty June 3200 call today, at Rs 9. (Hope to make enough in 3 days to fill up my Accent fuel tank on 29th.)

Wonder if u sold any ?

AGILENT
PS I was wrong when I said many of us have this strategy... looks like only a few of us write calls shortly b4 expiry

 

[Agilent]

My broker once advised me (when I felt the market was overvalued and wanted to write some calls) to buy puts instead.

In many ways the latter is a less risky. (Shorting is, in thoery, 'infinitely' risky because if forced to cover, the security may be simply unavailable)

What are members' views?


AGILENT
PS Abhinav : Notwithstanding my preferences above, I wrote some more calls today, nifty June 3100. After all , what are the odds nifty will gain>100 points tomorrow ?

Day after, if you are in Blore, I can treat u to dinner !

 

[vince]

Hi Agilent,

As you have rightly said shorting is infinitely risky only in theory. I would have a trade management plan in place before I write or buy options and I have no bias agains buying options as some people do.

My strategies include both buying and writing options as and when required ( that would be decided by the market action). I prefer not to have a bias about market direction either and nor do I like to predict how far or long the trend would last. A judicious use of a trailing stop is what I prefer.

About the security not being available ,I would avoid such counters in the first place, or take an opposite positionsin the futures segment if necessary.

Regds

 

[Spiderman]

hi vince/agilent,
I am trading stocks and had a good run so far. Now I want
to switch to derivative side also. Options are too complicated to me , but
I will learn trading them later. For now I want to buy sell futures.
So can you seniors guide me how to buy a future contract . suppose I buy or sell a nifty future contract what will I pay as commissions, what margin will I be paying , and how much money should I keep with my broker?
suppose I have 50000 in account will icicidirect allow me to buy one nifty contract or they want bigger amounts to allow future trading because of margin calls.
regards,
spiderman

 

[vince]

Hi spiderman,

You can buy/ sell a futures contract pretty much the same way you buy /sell stocks.
Commissions are negotiable with the brokers although icici brokerages are very much on the higher side.

Margins vary between 10 to 18 % for the nifty from broker to broker, and are much higher for stock futures. You could check with icici what are their margin requirements. Margin calls are made only if there are insufficient funds in your account or your position is squared off.

I would not recommend icici for futures trading since they do not offer live streaming quotes and traders have also faced log on problems , and frequent disconnections among other problems. you could go thru the brokers thread to get some feedback on other brokers as well as icici. However its your call.