Options Trading

[marcus]

Hi Faltub, can you you please elaborate on GAP? What is it? Are you referring to the spikes that normally occur within the first few minutes of start of trading?

Thanks,
Bharosey.

Guess faltie is too busy making money so i will try to answer this question as well.

Gaps simply means a gap in the chart it can occur on any time frame 10 min, 20 min, daily. It is generally common on daily time frames as the market is closed and economic factors which occur around the world effect the assets price when the market opens. The asset then gaps up or down on opening. This occurs when the high of the day is below the low of the previous day or when the low of the day is above the high of the previous day. Some books also classify a gap to occur when price opened higher than it closed the day before, thereby leaving a gap.

Anyway lets take an example with nifty just for understanding purposes let us assume 1% change in nifty changes your profit/loss by 8% just as an example of understanding the effects of leverage. This is just an example to explain. Today nifty closed at 5167 and you are long, u calculate your SL at 5105, so you open your terminal and punch in an AMO sl sell order at 5105 with trigger say 5110.

Now next morning because of some bad news (or whatever) nifty gaps down and opens on 5950, so what will happen to your SL order? It will not be executed as it was jumped the trigger price was never reached as nifty gapped down and opened below it. Before you can do anyting you have exceeded your SL and nifty is down by 117 points, so it is down by 2.26% which means you are out by 18.08%. If you were using more exposure and/or had tight stops you would be very nearly wiped out isn't it?

See this is just an example to explain the concept not a historical example there have been much larger as well as smaller gaps in nifty than this, imagine the effects.

Hope that clarifies

 

[niksan]

My question is: Do people not apply Stop Loss (and why not) with Futures trading? With a reasonable Stop Loss, you can avoid Margin calls (at least as per my understanding) and also, limit your downside, so that you 'do' have a future.

Again, what am I missing.

Thanks,
Bharosey.

Everyone talks about applying a 'stop loss' but very few people actually apply it while trading. for a simple reason that they just don't want to take the loss..and keep hoping that today or tomorrow the markets will move in my direction and I'll at least break even! BTW, this is my experience When I was new to trading futures, I did the same thing. One learns 'stop loss' only when one looses big time! not just reading in books and blogs

 

[rambharosey]

Dear Rhambharosey I am really sorry I missed this post of yours.

To answer your question when a gap up or down occurs your SL trigger will be jumped and your stop loss will not be triggered, this is a very common occurance. Ma I ask whether you are familiar with the practicalities of stop loss orders,? you r probablly of the opinion a sl order is a limit sell order but its not you have to input a trigger price. Just try to read about the stop loss order.

Your second para is correct but stop loss orders are far from full proof, there are so many loop holes in the SL order, you can lose a lot but with a naked (buy) option you can not lose more than your premium under any cicumstances you can even lose less than your premium if your stop loss is triggered but even if your stop loss is not executed you will not lose more than your premium.

Hope that clarifies

SL, which seemed to be a benign life saver, suddenly does not appear like that anymore. I have been using SL pretty regularly, with just a Rs. 1 separating my trigger price and Limit price and inevitably, my SL orders have been getting executed very close to trigger price.

But, now, in view of this GAP thingy, I would like to understand SL better and how to best circumvent its limitations. Marcus, can you please point me to some source which would give me a better understanding of how I can make best use.

Say I have a Long futures position at Rs. 100 and I put a SL with trigger price of 95 and Limit price of 92. If LTP comes anywhere between 92 and 95, my SL order has good chances of being executed. But, if market falls 'suddenly' to 90, my SL will not be executed..from there on, if the market continues to slide down and down and down to 80..70..whatever, I could loose my entire margin...scary!!

What is the way out? One obvious way is to set a good spread between the trigger price and Limit price (say trigger price of 95 and a Limit price of 85 in the above case)...is there anything else that can be done?

Also, I trade with hdfc Securities. It has the following two drop down fields:

1. Book: RL/SL (Regular Lot/Stop Loss)
With SL, a field "Trig Price" gets enabled
2. Ord Type: Limit/Market;
With Limit, a field "Price" gets enabled

In the case I described above (SL with trigger price of 95 and Limit price of 92), I set "Book" to SL ("Trig Price" as 95) and "Ord Type" as "Limit" ("Price" as 92).

I am wondering what would happen if I set "Book" to SL ("Trig Price" as 95) and "Ord Type" as "Market". Would this mean that my order would be executed at the best available price at or below 95 (for example, at 90, if the price falls 'directly' from 100 to 90)?

Thanks,
Bharosey.

 

[aca_trader]

Yes it couldnt reach at 65 but now it is trading at 36 (just 7 rs down than 43 what u assumed) and ur put strike 50 at 14.05, u can see the result :

Premium receive on 60 Strike Call Ashok Leylend 8833
Premium receive on 65 Strike Call Ashok Leylend 5968
Premium receive on 50 PUTl Ashok Leylend 17428
----------
Total Premium received 32,229

Ashok Leylend Put is trading at 14.05 so ur squaring off value comes to 67088

Net loss on risk free strategy.......67088-32229 = 34,860+ brokerage + amt to be paid on squaring off of calls (else let them expire)

I think the above explanation that shows a loss above 34860 is enough to prove .what I was indicating.(with a sarcastic rolling eyes)

.What more can u expect from an equity trader

BTW........what u could have done now.......?? sell some more calls......? or buy puts......? How large account u have........?

F

First of all, I never said that it was a risk-free strategy. On the contrary, I attached a risk-reward graph by the name of "Risk Graph".

http://www.traderji.com/140657-post13.html

About the adjustment of option trade, as I said earlier the alternatives available are much more than simply booking stop-loss.

This bullish strategy was designed on 26th December. The uptrend was invalidated on 16th January when the pivotal low of Rs. 47.10 was cut. Hence, there was no logic in holding the put of Strike 50. Hence, this put was sold next day in market @ Rs. 3.35 thus booking a loss of Rs. 1433 on sold puts. Even if no further action would have taken place, the trade would have resulted in a profit of Rs. 13368. However, As the uptrend was invalidated and there was a tough resistence of Rs. 51, Using the Flip Adjustment Strategy, one more call of Strike 50 was written which gave additional profit of approx. Rs. 10,000.

Best Regards,
--Ashish

 

[skarpio]

I have been scraping as much as I can from these few threads on options. I still have a few questions which I would like you to help me answer:

[1] Contract of interest: OPTSTK-IFCI-28-Feb-2008-CA-70.0

[2] Strategy: Daytrading (paper-based)

[3] Action: Suppose I bought 1 lot @ 3.90/- and sold it off later in the day @ 4.10/-.

[4] Assumption: We have not hit the strike price at any point in between the buy and sell.

[5] Questions:
1. Can I do this?
2. If so, and if the strike price doesn't matter, then according to my excel based calculator (which I am attaching for your reference) I make some profit. Are my calculations correct?
3. If not, can someone please help me correct them?
4. Note that I typically use this calculator to track my net profit/loss in the cash segment. If you think this is unsuitable for even such a purpose, do let me know. (I don't want to fooled by myself thinking I am making money when I am not )

Feel free to play with this excel sheet and report me any bugs. Btw: I never thought I would have such a tough time figuring out all the tax percentages.

[Oh! I just remembered now: some of the percentages are incorrect in my excel sheet (since the excel sheet has the values for cash segment)! Will update the sheet asap]

 

[aca_trader]

I have been scraping as much as I can from these few threads on options. I still have a few questions which I would like you to help me answer:

[1] Contract of interest: OPTSTK-IFCI-28-Feb-2008-CA-70.0

[2] Strategy: Daytrading (paper-based)

[3] Action: Suppose I bought 1 lot @ 3.90/- and sold it off later in the day @ 4.10/-.

[4] Assumption: We have not hit the strike price at any point in between the buy and sell.

[5] Questions:
1. Can I do this?
2. If so, and if the strike price doesn't matter, then according to my excel based calculator (which I am attaching for your reference) I make some profit. Are my calculations correct?
3. If not, can someone please help me correct them?
4. Note that I typically use this calculator to track my net profit/loss in the cash segment. If you think this is unsuitable for even such a purpose, do let me know. (I don't want to fooled by myself thinking I am making money when I am not )

Feel free to play with this excel sheet and report me any bugs. Btw: I never thought I would have such a tough time figuring out all the tax percentages.

[Oh! I just remembered now: some of the percentages are incorrect in my excel sheet (since the excel sheet has the values for cash segment)! Will update the sheet asap]

Yes it can be done if option price touches these levels.

Regards,
--Ashish

 

[Satyen]

hi
asish can you please suggest/ guide how to use options with different chart patterns

Regards
Satya

 

[aca_trader]

hi
asish can you please suggest/ guide how to use options with different chart patterns

Regards
Satya

Hi Satya!

For trading patterns with options, refer to "K.h. Shaleen - Technical Analysis & Options Strategies". It's a very good book with specific refernce to adoption of different market strategies when patterns are developing or have broken out.

Best Regards,
--Ashish

 

[sanjugalande]

fends i am frequent option trader yet as a learning it
my doubt is
1. in option it is always said that writting/selling option has unlimited loss
2.but when i sell nifty call(CE) there is no risk of excerise buy buyer till expairy day so though nifty goes up for week and come down after that i remain in profit... how does line 1. relates to this?

3.if i sell stock call (ca) and somebody excercise his call how is buyer selected by exchange when some one excercising his call?

thxs

....sanju!!

 

[skarpio]

Yes it can be done if option price touches
these levels.

Thanks for the clarification!