unlimited risk???

[hbkhrushikesh]

Hi All,
I am very new to option trading. I have a few bharti shares ( avg price Rs 300). The price has been continuously going down....... I am buying on each downslide as i am very positive on the long term prospects of this company and think this windfall rite now is temporary. I however cant keep buying the stock for long on each fall as i am sure my money will run out sometime :annoyed:

I want to buy some put options as a hedge to my investment for the next 3-6 months. My plan is to wait for the 3rd qr and annual results ( arnd next may ) to see the effect of the present price-war on the bottom line of the company.

If the price goes down( (say 225) i want to exercise my put option to make some money. This way i intend to keep my short term losses to manageable level and possibly generate money to re-invest in stock for long term holding.

Reading about use of options for hedging, this seems to be plausible. However, I have read in so many places that a put option carries unlimited risk ( downside)!!!!!!! this statement frankly with my limited knowledge of options, scares me.

Can someone from this forum, try and explain to me the worst case scenarios in the above mentioned bharti transaction? if i buy a put option, how do i stand to lose unlimited amount of money ( worst case scenario???)

I use ICICIdirect for my investments.

Regards,
Rishi

 

[rkkarnani]

Both the options carry unlimited risk: CALL and PUT!! The risk is unlimited when you "SELL" an Option!!!! Selling an option is also called writing an option!! Option writers have unlimited risk. A person who "BUYS" an option has a risk limited to the Premium he pays!!!
For having a look at the very basics, you may have a look at this write up :
http://tinyurl.com/czz7uk

 

[Capricorn]

Writing a put option will carry the risk u mentioned. However what u have to do is buy a put option to reduce your risk. So all u loose will be the premium/buy price as worst case scenario. Cheers

 

[hbkhrushikesh]

Hi All,
I am interested in SAIL. But currently i am not sure how low the shares wud go... I have heard a lot abt writing a put option b4 buyin an equity that u eventually want to own.

I want to rite a Put option on sail strike price at 150 feb series. If i do that ... i see 3 scenarios, SAIL stays put... option remains unexercised... i pocket premium, use that money to buy a position in SAIL. SAIL moves up option remains unexercised... i pocket premium use that money to buy a position in SAIL.
Now comes the part where I would like to have some advice, if SAIL falls uncontrollably, say to Rs 100..... my loss wud be Rs50* 1000 (lot size)= (50k - premium)???? I want to buy SAIL at the end of this transaction (as wud have happened in american options trade??) As trades in India are cash settled, will buying shares of SAIL at 100 make me some profit( virtual) due to the fact that i had received premium??? I have heard a lot from my american friends about writing a put call in order to buy shares at a discount in the company that u want to invest i.e. for me if SAIL is a good buy now at Rs166 then its a much better buy at 100 (on fundamental level-long term perspective, irrespective of what the technical charts say) however, as we have a cash settled system, does it mean that i can take my cash at expiry, and then buy shares in cash market??

Also whats the thing abt unlimited loss in case of writin put contract.... when the share price can only go to 0??? i.e. for writing a put contract of SAIL (1000) at 150 strike price 150, if in the worst case scenario SAIL goes to Rs 0 my loss wud be (150-0)*1000= Rs (150000-premium)??? Considering the Rs 0 scenario has almost 0 probability, where is the risk of unlimited loss??? can ne member plz expalin if i am missing something??

Thanks and regards in anticipation,
Rishi