The Giant thread of options

[beginner_av]

Hi Praveen you are right...thats exactly what it is..Any limit being clientwise, brokerwise or marketwise is a maximum number of contracts for a given instrument that the entity can hold. This prevents one investor/client from gaining such great influence over the price that he can begin to control it or control payment (margin) related risk in the market (as in case of brokerwise limit) and to avoid cash prices being affected adversely and artificially (through marketwide limits).

 

[beginner_av]

I used a hypothetical person m and n...actually all persons enter into contracts with the exchange which in turn enters into reverse contracts with others...thereby eliminating the risk of default (this process is called novation if i am not wrong). Hence during a trade when you square off...it can be any person...and during assignment the exchange picks up one writer randomly and assigns the position to him/her.

 

[bvpraveen]

Hi,

I understood about the client/broker/market limits.

I used a hypothetical person m and n...actually all persons enter into contracts with the exchange which in turn enters into reverse contracts with others...thereby eliminating the risk of default (this process is called novation if i am not wrong). Hence during a trade when you square off...it can be any person...and during assignment the exchange picks up one writer randomly and assigns the position to him/her.

So does it mean even the option writers position are traded, just like option holders being traded? ie the obligation to give/take the underlying at the strike price is also traded?

Thanks.

Praveen.

 

[mihir.urs]

Hi every1

Am new to this forum n to options trading . Can some1 plz explain hw it wrks.
rite nw nifty 3600 CE is tradin at 147 and nifty is at 3691.95 . So hw much does one pay to buy this option ?? 147 ??? Then wht will be the break even
pt of nifty n when will the option start generatin money ...Plz show the calculation...

 

[GRORICH]

Dear Beginner ( Actually you are guru to us ) ,

Thanks for launching such a good educational , training and instructive thread. I am confident this thread would be useful to all the members like us , who are interested to know about options etc . Wishing you all the best.

Mohan

 

[beginner_av]

Thanks mohan. please dont glorify me so much. i am just putting my random thoughts together. i hope you really gro(w)rich more after learning about options.
Praveen a writer of the option is the seller...just as you buy and sell stock..you buy and sell option..if u have sold option you can always buy it back any time.

 

[beginner_av]

Now let us come to the second point. If you are trading options for a longer term as in a buy-hold till expiry or advanced strategies like spreads, ratios etc (will be covered in details some other time), DO look at weekly and monthly charts. The reason is that if you want to make money in buying options, the underlying stock better be in a strong trend or else you will not be able to cover the option price and make a profit. When a option seller writes an option (selling and writing are the same thing), he uses sophisticated pricing model to ensure that there is a high probability that the underlying will not move too adversely against his position. No options pricing model is 100% accurate, even though there are automated systems in the US which quote option bid/ask rates depending on the change in tick value of the underlying. Moreover just the minute after your trade is executed, the conditions may change resulting in change in prices. In India, other than Nifty Options that are traded by a lot of big guys and a few other large caps, very few options are traded according to their fair value or deviations (overpriced/underpriced) around it. Lot of sentiment value is added which puts the option price above or below its fair value.
Even though I told that I will not go into maths part, partly due to the complexity and partly due to my intellectual inability, for those who are interested let me give u a pointer. If you take most of the common pricing models like Black Scholes etc, the basic anomaly is that it takes into account normal distribution. Even if it approaches ND in theory over a longer term, the most liquid options in India are only for a month...and hence SKEWNESS in the distribution is a big reality...and hence a lot of sentimental value is added on whether the market is bullish or bearish.

Anyway coming back to the longer form of waiting till expiry, this is not the most efficient way of trading, but you do make serious money here. However on the FLIP SIDE, this is the strategy where most of you will LOSE MOST OF YOUR MONEY.If you buy a call or a put without having adequate knowledge about the overall market condition, the sector and the stock mostly you will lose money as your options will expire worthless. Hence it is essential to look at the weekly and monthly charts to INCREASE your probability of winning. There are different forms of profitable options trading...but that we will discuss later.

Another important aspect of this form of trading that I call buy-hold is your mental state. Right from the beginning be sure that you are entering a BH or a multilegged (buy-Sell spread, Ratio, butterfly etc) that you will hold till the end. So as soon as the price starts going against you by a few ticks or more you dont panic and run to adjust your position. Have very well defined CLOSING points on the UNDERLYING based on which you adjust your position or abandon your position. Otherwise Intraday volatility will kill you. You can look at the closing price of the day or even the closing price of the week.

For example You buy XYZ 100 CA for 5 and sell XYZ 110 for 2 when the underlying is at 100. Now during the day the underlying moves to say 98.90 and you suddenly see that the 100 CA is trading at 4.25 only while the 110CA is trading at 1.80. A typical reaction is oh no! I have already lost Re0.50 on my bought call...now what do I do? THIS IS WHERE MOST OF US DO ALL KIND OF NONSENSE. Wait till the close...check the chart for price and volume and otherrelevant stuff and then plan for your next set of actions. And remember that when you enter the contract have a good reason to do so. Once you have entered, tell yourself that it was the best thing to do under those conditions. Dont say shi* why didnt I wait? Now the market has turned...I could have got more/less..blah blah...Instead think what can happen now and compare with your plan of action.

 

[CreditViolet]

THIS IS WHERE MOST OF US DO ALL KIND OF NONSENSE. .

Yup

Nice thread, I am digging into options myself.


Rgds
CV

 

[RAMDAS]

Dont say shi* why didnt I wait? Now the market has turned...I could have got more/less..blah blah...Instead think what can happen now and compare with your plan of action.

Dear beginner_av,

what you say is correct, mental aspect is the biggest problem for trader.
Yesterday i BUY Nifty 3600 CALL at Rs 86.. Technical reason for buy was..on daily chart i saw nifty finding support at SMA200, so i buy Nifty3600 call yesterday when nifty touch SMA200.. and after touching nifty bounce and start going UP. My call touch Rs 123 and i exit at Rs 121 with +35Rs.
I was happy that i got +35 But when i closed pos..i realise..on technical ground Nifty has turn Bullish after bounce from SMA200. and today that same call reach Rs 245.. and today i was doing shi*****

This is good Thread, exploring many aspect of Option Trading.

I am basicaly Forex Trader,but recently attracted toward Options.

Thanks
Ramdas

 

[beginner_av]

well today will be a short post, but it is about one of the most important aspect of options trading that can make or break you as a trader. Call it discipline, planning, psychology, strategy whatever, but the end result is the same...win or lose.
How do you trade? Buy and then when stop is hit, or target is acheived, sell or the reverse of it. Thus there are three possible actions...buy - wait/watch - sell.
Now come to options trading. You spot a breakout opportunity..You buy a call ABC 100 for Rs 5. Now it goes against you. Call drops to Rs. 4. What would you do? Here the demon inside you wakes up. It can come in various forms. Suddenly you become the great strategist. You dig up spreads...you sell 110 call for Rs 2.00...the demon prods you more..."hey the mkt is going down...you still may incur a loss of rs. 3...sell more"...and tap..tap..you sell one more at Rs.2.00. Now u have converted your position into a ratio spread..with unlimited risk on one contract...But alas the mkt turns by evening. the strtegist in you say no probs...even if it goes to 110, I make big profits...then I'll square off...
And then it reaches 110 in a jiffy..and u r tembling and stuck...ur 110 call is now Rs 13 as it has lost time premium with addition of intrinsic value...and 110Ca is Rs 6.50..volatlity has increased its price...What do you do now?

The point is with options taking a loss is far more difficult. Options offer you some brilliant techniques to adjust your positions by converting existing positions...and at the same time offers spectacular techniques to screw yourself...and since options price swings wildly, u cant put a mechanical stop in advance. So decide how you want to trade it...and STICK to it. If u want to buy and square off..NEVER convert it into a multilegged strategy...If u plan to trade multilegged strategy, never square off one leg only...If you want to trade volatility, dont look at small price changes.

This one advice will change your options profit forever...