The Giant thread of options

[beginner_av]

Hi Avi,

One more doubt:

If I'm dead sure about my view on the market, either bullish or bearish, which one will be best - BUY option or write(SELL) options.

For eg., if i'm very much bullish on Nifty whose spot price is 3500. Then should I BUY call option (ATM/OTM) or SELL put option whose strike price <= 3500? Which one will be profitable, if we assume that we have enough margin money required for writing options.

Praveen.

First guru gyan
DONT EVER BE VERY VERY SURE OF MARKET DIRECTION..see what the market is doing...my trading has improved tremendously after i incorporated this into my belief system

Now
if u are somehow very sure, then obviously buy option...reason is very simple...
1.writing gives u a limited amt of money...and if u r so sure about the dircetion, buying will give u many times more
2.buying doesnt require margin...so ROI is better.
3. Now i am going into my bread and butter stuff....(only this and no more cos this is dry bread..not butter ) write at a much lower level below support and use that money to fund your call. (DONT BLAME ME IF U LOSE UR CALL MONEY AS WELL AS MARKET REVERSES AND TAKES UR WRITTEN PUT OUT. I never said I am giving u a trading system )

 

[beginner_av]

On Put Call parity front

heres the hint...think arbitrage

first one to answer correctly gets reputation points

 

[bvpraveen]

First guru gyan
DONT EVER BE VERY VERY SURE OF MARKET DIRECTION..see what the market is doing...my trading has improved tremendously after i incorporated this into my belief system

Now
if u are somehow very sure, then obviously buy option...reason is very simple...
1.writing gives u a limited amt of money...and if u r so sure about the dircetion, buying will give u many times more
2.buying doesnt require margin...so ROI is better.
3. Now i am going into my bread and butter stuff....(only this and no more cos this is dry bread..not butter ) write at a much lower level below support and use that money to fund your call. (DONT BLAME ME IF U LOSE UR CALL MONEY AS WELL AS MARKET REVERSES AND TAKES UR WRITTEN PUT OUT. I never said I am giving u a trading system )

Thanks for your explanation.

Understood the different possibilities well. The third option looks interesting . Still long way to go in learning Options.

Meanwhile I don't know about Arbitrage, as I'm still learning Options.

Praveen.

 

[beginner_av]

Got some time..so here I am with a short one...Some of u have asked me whether options can be used for daytrading? There is obviously no right or wrong answer. But here are some pointers that can make u take a more effective decision.

When u day trade u r trying to capture price movements within a day. U dont hold ur positions overnight to increase profits or catch a longer trend. In such a case you will want to capture the maximum price movement, which will be given by highest delta Options which are deep in the money. But hey, when most options will approach delta of 1, as they are more in the money in our dear markets liquidity disappears...so why not trade with the "HIGHEST delta", which is the instrument itself like the stock....

There is however a counter argument that when prices fall, the less than 1 delta will help in cutting losses...that is if price falls by Re 1, the option may decline by 0.20 only thereby reducing losses...

The above is true theoretically...(newbies pls dont quote books to prove how theories are correct and blah blah)...In the Indian market if the price falls buy Re 1, and the delta dictates that option price should fall by 0.20, u'll actually see quotes disappearing...and the offered quote may be down by 0.60..by the time u decide to sell, stock may fall by another Re and option price goes down more etc..and mind you u cannot put a mechanical STOP LOSS...putting u into a soup

So the best thing in my opinion is to directly day trade with the stock...

 

[uasish]

Hi,
I occassionally trade in options,becoz 1st i do not understand it properly 2nd indian option is more skewed with "Time Decay",hence i would prefer to write ,but sometimes at moments of uncertanity (& when stuck up with loss making stocks) purely to hedge i would buy puts (calculating the portfolio the no of contracts reqd).3rd reason for my aversion to options is that this the only instrument in capital mkt which appreciates / depreciates (some times more than 90 degrees)very very fast (not compatible with my mental make up),though there are sufficient strategies to protect that ,as Subrata has shown,still it is not my cup of tea,becoz of illiquidity in stock option cant place suitable SL.As now the brokerage has come down & slowly the liquidity is also rising,a good instrument to earn/loose.

Asish

 

[beginner_av]

Hi uasish,

try first with NIFTY options...liquidity is better than most other instruments...lot size is very small...ideal for learning.

 

[subratabera]

Well I am thinking of a safe strategy here...Please comment if you have found something wrong...

Let us make some assumtions first...

Let its four days before this months expiry...
Let Nifty (spot) is at 3800...

Now sell two 3900-call options at approx. Rs. 100 each and buy one Nifty (future)(next expiry each)...

Now square off your entire position if Nifty crosses 4000 (I think it will take some time to reach at this level which gives you time erosion benefit) which gives you a profit of about 100 points(because delta is 0.50 for those calls)...

If Nifty moves downwards (suppose 100 point), buy one ATM put at 3700 (around Rs. 130, it will be cheaper due to time factor)...this will prevent you from major correction...

You will earn about 70-200 points by following this strategy irrespective of Nifty movement...By the way don't ask me the name of this strategy(you may call it Su....

Waiting for comments...

Subrata Bera.

 

[vince]

Well I am thinking of a safe strategy here...Please comment if you have found something wrong...

Let us make some assumtions first...

Let its four days before this months expiry...
Let Nifty (spot) is at 3800...

Now sell two 3900-call options at approx. Rs. 100 each and buy one Nifty (future)(next expiry each)...

Now square off your entire position if Nifty crosses 4000 (I think it will take some time to reach at this level which gives you time erosion benefit) which gives you a profit of about 100 points(because delta is 0.50 for those calls)...

If Nifty moves downwards (suppose 100 point), buy one ATM put at 3700 (around Rs. 130, it will be cheaper due to time factor)...this will prevent you from major correction...

You will earn about 70-200 points by following this strategy irrespective of Nifty movement...By the way don't ask me the name of this strategy(you may call it Su....

Waiting for comments...

Subrata Bera.

Hi ,
Have you attempted this trade. Let me point out a few things. In the frst part you are buying 1NF at 3800 sell 2 3900 calls. Fine so far but a square off at 4000 nifty would mean you have an inflow of 200 on NF , but you outflow on 2 3900 calls would also be 200+. The calls at the time of writing would have a delta < 0.5 since they are out of money and at square off > 0.5

When you are buying a put in the second case you are putting on a collar which you cannot book profits until you are holding the NF position since you keep loosing on the NF as long as the nifty keeps moving south . The premium recd. for the 2 calls is exhausted by buying the put and the loss on the NF since you are buying the put at about 100 points below where you took a position on NF.

Regds.

 

[subratabera]

Thanks @vince for pointing out my mistakes. I was thinking that there is something wrong with my strategy. That's why I posted it here. Well I never traded options before and learrning it slowly. I suggest you to modify this theory and add something to it. I am only inerested in the premiums of written calls. How is it possible with minimum possible risk???

Thankyou once again.

Subrata Bera.

 

[vince]

Since you are only interested in writing calls with minimum risk , it would have to be a covered call . All you have to do is to identify a fundamentally sound stock which you would want to own, in a neutral to bullish trend load up on it in the contract size lot and keep writing calls every month. Stocks that don’t do anything for long periods of time are ideal. The only risk being would be on the down side where you got to have a clear cut off point where you would want out of the stock.

Got a friend (investor not trader) who has made a fortune just writing reliance. Of course he owns the stock and does not go the synthetic way.

You could also do it the synthetic way via futures but the only difference being you would actually have to take a loss every time the stock dips whereas if you own the stock it would only be a paper loss and you can keep rolling down.

Why don’t you go thru the book “New insights to writing covered call options” by Lehmann and Mcmillan (Vision books)