writing deep in the money calls
- Thread starter p81
- Start date
The reasons for writing deep ITM calls are many. You cannot take one in isolation. Let me give an example. Suppose I am holding a good portfolio of stocks. Using this I will write deep ITM options on either side to pocket some money with less risk.
Now Nifty is at 4850 levels. Suppose I write 4400CE at 505/- and 5200PE at 362/-, I collect 867 pts. My maximum profit is only 67/- as long as Nifty expires between these two extreme strikes. Assuming a margin of say 1.50 lakhs for writing those options (2lots each) my returns work out to 3.5% to 4% after cost. My risk starts only if Nifty crosses this extreme. For an option trader the choices are many to cover such an eventuality. I may even get out of the positions if I achieve say 2% return on capital blocked. When we write deep ITM options the premium recd almost takes care of the margin requirement too.
Just some of my ideas.
Thank you sir for the reply. Can you tell me for example from 10 trades how many you let them exercised? And dont you think for just 67 points gain this trade is very risky?
Talking about me, i wrote 5300/5400 calls from dec 09 to march 2010 and recieved good premium as they expired unexercised. I always write calls in one month advance to get the benefit of time value. Any comments or suggestion will be highly appreciated as i am quite a newbie in options.thanks again
Talking about me, i wrote 5300/5400 calls from dec 09 to march 2010 and recieved good premium as they expired unexercised. I always write calls in one month advance to get the benefit of time value. Any comments or suggestion will be highly appreciated as i am quite a newbie in options.thanks again
Nifty options are european, they can be exercised only on expiry.Options on Nifty cannot be exercised before expiry. 67 points gain is risky? That depends on individual assessment of risk involved. If I am using my portfolio as a margin to write such option trades, I would consider earning 3-4% per month as healthy. It is good that you wrote OTM calls to gain through Dec till now. Since the mkt has gone down one way since the beginning of the year this has helped.
But do have a contingency plan in case the swing goes the other way. A 200 pts rise on a single day (it has happened before and will happen again) will cause panic and we end up doing something foolish. Plan for eventuality and also retreat.
For the trades based on your belief, go fight through the front door but leave the back door open.
But do have a contingency plan in case the swing goes the other way. A 200 pts rise on a single day (it has happened before and will happen again) will cause panic and we end up doing something foolish. Plan for eventuality and also retreat.
For the trades based on your belief, go fight through the front door but leave the back door open.
p81
Option writing is a dynamic activity. Rarely do option writers write and sit on their hands till expiry unless they have written far OTM options. The theoretical calculations that we do is assuming we square off at expiry. But in real world, the market changes contours everyday and we have to change or adjust positions everyday too if required.
Even if we write an option thinking that we will leave it till expiry, we will not be idle if we find that the written option is already down 30% of value in a short span. If we can extract 60% of the premium value in a shorter duration, we will close the position as the maximum juice has been extracted. The freed margin can be used to write the next option when the opportunity arises.
On a personal note, I find discussing personal trades largely irrelevant unless it is to expand on an idea. You have to spend time and energy understanding the concept, following few trades of one person does not help.
Bhavanaon ko samjho
Option writing is a dynamic activity. Rarely do option writers write and sit on their hands till expiry unless they have written far OTM options. The theoretical calculations that we do is assuming we square off at expiry. But in real world, the market changes contours everyday and we have to change or adjust positions everyday too if required.
Even if we write an option thinking that we will leave it till expiry, we will not be idle if we find that the written option is already down 30% of value in a short span. If we can extract 60% of the premium value in a shorter duration, we will close the position as the maximum juice has been extracted. The freed margin can be used to write the next option when the opportunity arises.
On a personal note, I find discussing personal trades largely irrelevant unless it is to expand on an idea. You have to spend time and energy understanding the concept, following few trades of one person does not help.
Bhavanaon ko samjho
Thanks again. I think i am very poor in putting words together, sorry for that. I asked the question to assess what is more profitable while writing deep in the money calls. To be frank with you all due respect i dont understand why people write deep in the money calls compared to the risk they take.May be i will understand in due course when i try myself . thanks again
| Thread starter | Similar threads | Forum | Replies | Date |
|---|---|---|---|---|
| Z | Required AFL for Options Writing | AmiBroker | 2 | |
| C | What is the risk of writing covered call? | Options | 1 | |
| S | Writing Options When Vix is at 99%tile | Options | 2 | |
| V | Nifty Option Writing on expiry day | Options | 23 | |
| V | Amibroker writing to file function | AmiBroker | 1 |