Madhav trading style
- Thread starter madhavareddy1203
- Start date
hey purushotham, this is called hedging...a advance strategy used for high positions...
Good luck / DanPickUp
thanks DanPickUp... think better do a google and different name is called for same thing...so simple...
and different name is called for same thing...so simple...
http://www.theoptionsguide.com/synthetic-long-call.aspx
http://www.theoptionsguide.com/synthetic-long-put.aspx
Take care / DanPickUp
@Madhavareddy1203
I got a PM from a member which had questions related to what you do. So I thought I am going to post parts of my answer about that in your thread, as also some readers here do not understand what you do in detail. That also will serve them, as you trade a more advanced option strategy which is called: Synthetic put and calls.
Here parts of the PM and the answers from my side to those questions:
Dear Dan,
I am writing my understanding about synthetics. Please correct if anything is wrong. To me it looks like a near zero risk with limited profit strategy. It is like having a deep itm covered call. But ITM covered call has certain disadvantages. If the fall is very steep, the entire position will result in a loss. But synthetics have zero risk and have the advantage of minimum guaranteed profit of the call premium. Is this correct?
Answer:
- We also result in a loss with any synthetic put or call (and I only speak about them, as there are various other synthetic strategies to trade) when market goes against us. We do not have any profit guarantee. The same with any future system: There is no guarantee of profit with any of those systems. We can reduce our risk by using synthetic put and calls and that is why we can use them.
- If we take itm options to implement the strategy, we reduce our limited possible loss. Why? Our loss is the different between the value of the underlying we sold (Synth Put) or bought (Synth Call) and the value of the option premium we buy in any of those synth options. Do some calculations on that and you will see the different profit and loss potential when taking either otm, atm and itm options.
Next question:
On 16th August:
- Nifty Aug futures Opened at 5720.
- August 6000 Put Opened at 272.
Why has the August 6000 put a delta of 1 and no time value premium?
Answer:
Delta: (Delta) represents the rate of change between the option's price and the underlying asset's price - in other words, price sensitivity. For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying stock increases, the call option will increase by $0.70.
Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases in price.
As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00. (*)
So your put is around -1 delta.
OTM Put = Delta from - 01. until - 0.45
ATM Put = Delta from - 0.45 until - 0.50
ITM Put = Delta from - 0.51 until - 1.0
http://www.traderji.com/options/66266-option-trading-danpickup-5.html#post647575
http://www.traderji.com/options/66266-option-trading-danpickup-7.html#post648816
Time Value: As you say: The Future is at 5720 and you have a 6000 put. So the put is deep in the money. Now what does that mean? As soon as options get in the money, time value and intrinsic value start to change behavior.
Out of the money option have much time value and nearly no intrinsic value.
At the money option have some time value left and start to increase intrinsic value.
In the money option start to lose quickly time value and as deeper the option gets in the money as higher the intrinsic value becomes.
Not mentioned in the above three szenario: Time to expiration, Volatility of the underlying, Implied volatility from the option.
As you have August expiry and a deep in the money put, no time value left.
http://www.traderji.com/options/66266-option-trading-danpickup-3.html#post641626
Take care / DanPickUp
I got a PM from a member which had questions related to what you do. So I thought I am going to post parts of my answer about that in your thread, as also some readers here do not understand what you do in detail. That also will serve them, as you trade a more advanced option strategy which is called: Synthetic put and calls.
Here parts of the PM and the answers from my side to those questions:
Dear Dan,
I am writing my understanding about synthetics. Please correct if anything is wrong. To me it looks like a near zero risk with limited profit strategy. It is like having a deep itm covered call. But ITM covered call has certain disadvantages. If the fall is very steep, the entire position will result in a loss. But synthetics have zero risk and have the advantage of minimum guaranteed profit of the call premium. Is this correct?
Answer:
- We also result in a loss with any synthetic put or call (and I only speak about them, as there are various other synthetic strategies to trade) when market goes against us. We do not have any profit guarantee. The same with any future system: There is no guarantee of profit with any of those systems. We can reduce our risk by using synthetic put and calls and that is why we can use them.
- If we take itm options to implement the strategy, we reduce our limited possible loss. Why? Our loss is the different between the value of the underlying we sold (Synth Put) or bought (Synth Call) and the value of the option premium we buy in any of those synth options. Do some calculations on that and you will see the different profit and loss potential when taking either otm, atm and itm options.
Next question:
On 16th August:
- Nifty Aug futures Opened at 5720.
- August 6000 Put Opened at 272.
Why has the August 6000 put a delta of 1 and no time value premium?
Answer:
Delta: (Delta) represents the rate of change between the option's price and the underlying asset's price - in other words, price sensitivity. For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying stock increases, the call option will increase by $0.70.
Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases in price.
As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00. (*)
So your put is around -1 delta.
OTM Put = Delta from - 01. until - 0.45
ATM Put = Delta from - 0.45 until - 0.50
ITM Put = Delta from - 0.51 until - 1.0
http://www.traderji.com/options/66266-option-trading-danpickup-5.html#post647575
http://www.traderji.com/options/66266-option-trading-danpickup-7.html#post648816
Time Value: As you say: The Future is at 5720 and you have a 6000 put. So the put is deep in the money. Now what does that mean? As soon as options get in the money, time value and intrinsic value start to change behavior.
Out of the money option have much time value and nearly no intrinsic value.
At the money option have some time value left and start to increase intrinsic value.
In the money option start to lose quickly time value and as deeper the option gets in the money as higher the intrinsic value becomes.
Not mentioned in the above three szenario: Time to expiration, Volatility of the underlying, Implied volatility from the option.
As you have August expiry and a deep in the money put, no time value left.
http://www.traderji.com/options/66266-option-trading-danpickup-3.html#post641626
Take care / DanPickUp
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