Lets Make some Money

[dineshknp]

Thanks for kind reply and it is called covered call. i was also talking about same but not mentioned that will short otm call. but was asking instead of stocks if we are long in sbi future then what will be the scenario?

 

[nirbhay Dixit]

The cost of carry (futures premium 2%) will eat into the premium that you will get from selling otm call(3%). It will limit your upside to the strike price of the sold call options,but will not do a lot to protect if the stock goes down. i.e more than 1 %. Its a zero sum game

 

[nirbhay Dixit]

In example of covered call. you can always make around 5% return monthly. This means you will always make money in stocks that dont tank more than 60% anually.This will be the break even point. The negative is that you will not make more than 60% a year even if the stock triples.

 

[dineshknp]

so any safer option for 3% monthly return without any risk? on index or stocks?

 

[dineshknp]

In example of covered call. you can always make around 5% return monthly. This means you will always make money in stocks that dont tank more than 60% anually.This will be the break even point. The negative is that you will not make more than 60% a year even if the stock triples.

Now if i am not holding any stock. and i want only 60% output. Here i have to first add the cost of stocks to buy and margin required to short a call. After taking both investments will i get 60% or your calculation is on 60% output on margin money required for shorting a call.

 

[nirbhay Dixit]

Ok, take example of SBI again. If we have a position in cash say 125 share. The cost will be
around 280000 at current market price, and the money required to short a call option is around 45000(depending upon your broker).so the total cost becomes 325000.So a 60% return will be around 50% on total capital.

 

[dineshknp]

Ok, take example of SBI again. If we have a position in cash say 125 share. The cost will be
around 280000 at current market price, and the money required to short a call option is around 45000(depending upon your broker).so the total cost becomes 325000.So a 60% return will be around 50% on total capital.

ok, so first after adding 125 sbi shares and shorting a call (total investment= 325000). i can earn 60% rs.195000. in a year. one point to clearify when i have to short the call, at the start of same expiry month or before or near expiry date and which strike to decide for short?

 

[nirbhay Dixit]

In India the stock options are not very liquid, so i would suggest to short the call only at the beginning of the month or 3-4 days into it. However one thing you will have to keep in mind you will make nominal loss if SBI loses more than 60 % of its value in an year. However the real loss will only occur if you sell off the cash position.
One more thing that you will notice when you analyse the FII options data. They always sell stock options more than they buy stock options. They are doing this covered call all the time.

 

[mmca2006]

In India the stock options are not very liquid, so i would suggest to short the call only at the beginning of the month or 3-4 days into it. However one thing you will have to keep in mind you will make nominal loss if SBI loses more than 60 % of its value in an year. However the real loss will only occur if you sell off the cash position.
One more thing that you will notice when you analyse the FII options data. They always sell stock options more than they buy stock options. They are doing this covered call all the time.

Now suppose I have 125 SBI , and I shorted a 2400 call @29/- , if on 29/03/2012 value of SBI remains within 2429/-, then only i will get profit, otherwise I have to face loss though value of my stock holding will increase , for e.g if the value of SBI becomes 2500/-( suppose for rate cut and market friendly budget if at all happened)we have to face loss of rs.8860/-, now my question is how to protect my self from such loss , should I unwind my 2400 call and go for fresh short of 2500 call or 2600 call or I should go for shorting 2000 put along with shorting 2400 call which not only enhance my profit but also reduce my loss if SBI goes beyond 2500/-.

 

[dineshknp]

Now suppose I have 125 SBI , and I shorted a 2400 call @29/- , if on 29/03/2012 value of SBI remains within 2429/-, then only i will get profit, otherwise I have to face loss though value of my stock holding will increase , for e.g if the value of SBI becomes 2500/-( suppose for rate cut and market friendly budget if at all happened)we have to face loss of rs.8860/-, now my question is how to protect my self from such loss , should I unwind my 2400 call and go for fresh short of 2500 call or 2600 call or I should go for shorting 2000 put along with shorting 2400 call which not only enhance my profit but also reduce my loss if SBI goes beyond 2500/-.

as you mentioned that you will remain in profit if SBI remains within 2429. this you are considering spot price or future value? and i want to know in this condition there will be margin call?