Which Option Strike Price to buy?

[NJ78]

Hello experts and respected seniors! First post here.

I'm quite new to options trading though I've been trading futures on a part-time basis for a while now. So I hope someone in the know is able to clarify the following. I apologize if this is a newbie question but, in fact, I'm a newbie to options (but curious to learn).

So say Nifty is at 10300 now and I'm estimating that it will go to 10600 or 10700 in the next 2 months. With this in mind, I decide to buy Nifty calls of one of the early 2018 contracts.

My question is, should I be buying calls of 10600 strike price or 10300 strike price? In other words, with Nifty at 10300 with an estimate that it will go to 10600, should I be buying ATM calls at 10300 or OTM calls at 10600?

Thanks in advance for your help.

 

[Nikhil Dogra]

Your Options Are

1. Buy 10300CE & Sell 10600CE Simultaneously (Bull Call Spread Is The Most Efficient Solution )
   
2. Buy Naked 10300CE
   
3. Sell Naked 11000CE Each Month Till Your Time Horizon

 

[NJ78]

Thank you, Nikhil ji. Could you kindly recommend some training resources (books, videos, etc.) to get up to speed on Nifty & Bank Nifty options trading?

 

[travi]

Hello experts and respected seniors! First post here.

I'm quite new to options trading though I've been trading futures on a part-time basis for a while now. So I hope someone in the know is able to clarify the following. I apologize if this is a newbie question but, in fact, I'm a newbie to options (but curious to learn).

So say Nifty is at 10300 now and I'm estimating that it will go to 10600 or 10700 in the next 2 months. With this in mind, I decide to buy Nifty calls of one of the early 2018 contracts.

My question is, should I be buying calls of 10600 strike price or 10300 strike price? In other words, with Nifty at 10300 with an estimate that it will go to 10600, should I be buying ATM calls at 10300 or OTM calls at 10600?

Thanks in advance for your help.

This is the typical newbie mistake that many end up making.

Firstly, it doesn't matter what strike you choose until you understand how option pricing works. In your naked buy strategy you will be right and yet end up making a loss.
Lets take a practical example with figures that you have quoted.
If you intend to buy the JAN18 10600CE LTP at 140, this means that nifty has to expire atleast 10750/10800 for you to breakeven,
similarly, if you buy JAN18 10300CE LTP at 307, you still need nifty to expire above 10600 (a bit more for overheads) to breakeven.
To profit, you need Nifty to expire even higher.
Essentially, nifty has to move enough points to convert your time value into intrinsic value.

So far, it was all about naked buy.
After pondering for a while, you will realize that it doesn't make sense to simply buy the CE, and therefore you need to study various strategies which including selling other strikes "to fund" you buy CE.
Also, you can sell PE and still make a bullish strategy but beware of all the risks with selling puts.
One way to minimize risk is to sell 10400PE and buy the 10200PE (you have a max. loss of 200pts)
if 200pts is too much, you can buy the 10300PE instead.
OR
similarly with calls, you can buy 10300CE & sell the 10400CE and so on. (max loss 100pts) rather than just paying 307 for naked buy this strategy would cost you only 70. Flipside is your max gain would also be 100.
Brokers require a pretty large sum for margins that you should know about when writing options. (selling)

 

[Nikhil Dogra]

I learned about options by undertaking paid courses from Finideas/CBOE & Volcube

 

[raju.vzm]

This is the typical newbie mistake that many end up making.

Firstly, it doesn't matter what strike you choose until you understand how option pricing works. In your naked buy strategy you will be right and yet end up making a loss.
Lets take a practical example with figures that you have quoted.
If you intend to buy the JAN18 10600CE LTP at 140, this means that nifty has to expire atleast 10750/10800 for you to breakeven,
similarly, if you buy JAN18 10300CE LTP at 307, you still need nifty to expire above 10600 (a bit more for overheads) to breakeven.
To profit, you need Nifty to expire even higher.
Essentially, nifty has to move enough points to convert your time value into intrinsic value.

So far, it was all about naked buy.
After pondering for a while, you will realize that it doesn't make sense to simply buy the CE, and therefore you need to study various strategies which including selling other strikes "to fund" you buy CE.
Also, you can sell PE and still make a bullish strategy but beware of all the risks with selling puts.
One way to minimize risk is to sell 10400PE and buy the 10200PE (you have a max. loss of 200pts)
if 200pts is too much, you can buy the 10300PE instead.
OR
similarly with calls, you can buy 10300CE & sell the 10400CE and so on. (max loss 100pts) rather than just paying 307 for naked buy this strategy would cost you only 70. Flipside is your max gain would also be 100.
Brokers require a pretty large sum for margins that you should know about when writing options. (selling)

Hi Ravi,

Any good threads here to understand the basic concepts of option strategies for newbie?

Raju

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[travi]

Hi Ravi,

Any good threads here to understand the basic concepts of option strategies for newbie?

Raju

Sent from my MI 3W using Tapatalk

I wouldn't recommend any threads for "basic" bcos they are always digressed with other issues and doubts.
The best reference is Zerodha's Option Varsity, its really easy to understand and they have used examples related to NSE which you'll find familiar.

Once the basics are clear, u can read threads.

 

[raju.vzm]

I wouldn't recommend any threads for "basic" bcos they are always digressed with other issues and doubts.
The best reference is Zerodha's Option Varsity, its really easy to understand and they have used examples related to NSE which you'll find familiar.

Once the basics are clear, u can read threads.

Thanks for the reply. Yes, I m going through z chapters only. Great stuff indeed. Just to know is there any good threads available in TJ regarding options and to follow.

Raju

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