The Giant thread of options

[uasish]

Vince,
Seems to be good a strategy,thks.

Asish

[vince]

Most welcome Asish

[subratabera]

Thankyou very much vince. I will definitely buy that book...

Subrata Bera.

[chander_rb]

Originally Posted by beginner_av

On Put Call parity front

heres the hint...think arbitrage

first one to answer correctly gets reputation points

Hi avi,

I found something on Put Call Parity which I do not understand much. Would be nice if you could explain.

------------------------------
Put Call Parity Explanation

r as the risk-free interest rate, constant over time, in an environment with no liquidity constraints
S as a stock's price
t as the current date
T as the expiration date of a put option and a call option
K as the strike price of the put option and call option
C(S,t) as the price of the call option when the current stock price is S and the current date is t
P(S,t) as the price of the put option when the current stock price is S and the current date is t
Then the relationship is:
P(S,t) = C(S,t) - S + Ke-r(T-t)
The relationship is derived from the fact that combinations of options can make portfolios that are equivalent to holding the stock through time T, and that they must return exactly the same amount or an arbitrage would be available to traders.
---------------------------------------


Thanks & Regards

arbeecee

[beginner_av]

Here's a PM that I got (reproduced with permission). I am replying here for everyone's benefit

*************************************

Hi Beginner_av,

I read on this forum that you trade options successfully. Which options u trade usually ( stock/ index)? Which option strategies you implement?

I have read 2 books on options, one of them being Ashwani Gujral's. But being a software professional do not get chance to trade. I had traded call options sometime back in 2004 and thats it.

Which software you use for technical analysis?

I read that you are using data feed from Viratech. How is quality and reliabilty? Are you using intraday feed from them?

Thanks,
Amit

1. To answer honestly, whichever I feel suitable in the market conditions...
I cant talk about all of them as they vary widely from ratio to diagonal to calendar to guts to straddles etc...what i can do is give u some raw mat. try this link

http://www.euronext.com/fic/000/010/729/107297.pdf

2. read at least "options as a strategic investment" and "profit with options" - both by macmillan

3. amibroker, peter hoadley and excel...currently evaluating wealth lab and neoticker (suggested by CV and hats off to it)

4. I use EOD feed with hourly data. Reliability is good...I also use quotetracker (paid) to keep a tab on current market happenings with alerts.

[aca_trader]

Originally Posted by vince

Since you are only interested in writing calls with minimum risk , it would have to be a covered call .

Hi Vince!

If selling naked puts is considered to be one of the most riskiest option strategies and synthetically Short Put=Covered Call , then why covered call writing is regarded as a minimum risk strategy?

Best Regards,
--Ashish

[vince]

Originally Posted by aca_trader

Hi Vince!

If selling naked puts is considered to be one of the most riskiest option strategies and synthetically Short Put=Covered Call , then why covered call writing is regarded as a minimum risk strategy?

Best Regards,
--Ashish

LOL beats me. But since the question was about writing calls I thought that was the best option. Besides I ve seen many an experienced traders blanch at the thought of shorting naked options.

I guess its all in the mind though.

[beginner_av]

Originally Posted by aca_trader

Hi Vince!

If selling naked puts is considered to be one of the most riskiest option strategies and synthetically Short Put=Covered Call , then why covered call writing is regarded as a minimum risk strategy?

Best Regards,
--Ashish

I have seen many places harp on this...that covered call is just hoodwink...blah blah...same as short puts etc...but thats not the case. First u write covered calls only if u own a sound company and intend to hold it for the long term. And you write calls to generate income AND get the DIVIDEND too. Second there are many adjustments possible in case of covered calls like rolling up, down and out..convert to ratio, butterfly etc. Third, when you write a naked put and it goes down, you will have margin calls and u may not be able to do anything, but square it off at a large loss. Fourth, you can convert your covered call into a collar to protect your accrued profits, by buying a put that is partially or fully funded by the call that you initially wrote. Fifth, many people who want to buy a stock at a lower price DO WRITE naked puts where settlement is by delivery. But why should you, if the market is anyway going down?

There are hundreds of way that you can trade, only you have to know how you want to and WHY you want to.

[aca_trader]

Originally Posted by beginner_av

I have seen many places harp on this...

This is not harping. This is expression of opinion. But then, in today's world there are very few people with respect towards others' opinions.

that covered call is just hoodwink...blah blah...same as short puts etc...but thats not the case.

Risk and Reward of both the strategies are the same and hence they are equivalent. If outflow of money is to be considered, the overall return of portfolio will diminish with covered call writing when compared to naked put or money covered put writing.

First u write covered calls only if u own a sound company and intend to hold it for the long term.

When we are comparing Covered Call with Writing puts, covered call writing causes more outflow of money and thus is not the optimum use of capital so far as the two strategies are concerned.

And you write calls to generate income AND get the DIVIDEND too.

Dividend compared to Market Value in today's market is abysmal. Hence, dividend hardly justify more outflow of money for the same R:R.

Second there are many adjustments possible in case of covered calls like rolling up, down and out..convert to ratio, butterfly etc.

Equivalent strategies with the same R:R are possible in short put writing.

Third, when you write a naked put and it goes down, you will have margin calls and u may not be able to do anything, but square it off at a large loss.

MOney covered Put writing takes care of it with less outflow than would occur in a stock owned covered call writing.

Fourth, you can convert your covered call into a collar to protect your accrued profits, by buying a put that is partially or fully funded by the call that you initially wrote.

With margin facilities and less initial outflow, return on overall portfolio would offset the accrued profit advantage.

Fifth, many people who want to buy a stock at a lower price DO WRITE naked puts where settlement is by delivery. But why should you, if the market is anyway going down?

I never advocate that one should write put when market is going down. Afterall, short put is a long position.

There are hundreds of way that you can trade, only you have to know how you want to and WHY you want to.

This is the most quoted and most abused phrase of trading.
How can a person know which strategy should be adopted to achieve his objective unless and until he knows about various strategies, their intricacies and the pros and cons?

Best Regards,
--Ashish

[aca_trader]

Originally Posted by vince

I guess its all in the mind though.

Of Course, psychology plays a very big role.