Hi,TATrader,Sh50,Traderji,and all others in this forum,
Before proceeding with the actual aspects of option trading,I would like to discuss
for the newcomers,(I,also ,myself ,belong to that category only)why we can switch over to option trading,instead of only depending on the equity market for churning profits(or loses!!whatever way we want to interpret!!).
In the truest sense ,option trading is more of a hedging tool(which will be discussed much later),than a trading tool.But then,if utilised very cautiously,with a proper understanding of the directional movement of the stock (under consideration) ,and its corelation with the movement of the NIFTY,it can be utilised as a specialised trading tool(even a good intraday tool),for maximising the profit with the minimum investment.
I,being a common man ,would say it from my perspective,why I got interested in option trading.
Suppose ,I have a capital of Rs. 10,000 and nothing else.I have scrutinised the scrips of the stockmarket very minutely,and have made a small database of some of the best scrips in the market;for eg. INFOSYS,TCS(the irony's of today's market!),DIVIS LAB,Dr. REDDYS,etc.But then ,as these stocks are quite high priced,and are not suitable for my budget,---I have narrowed myself down to TISCO and NTPC.
Now, considering an investment in TISCO:
An investment of Rs.10000 enabled me to buy 28 shares of TISCO at the level of Rs.347.2 per share(as on 19th April'05 close)
I also, am certain that,there is a good probablity of TISCO bouncing back to a level of Rs.375 withen the next 4 days.
Suppose,considering an hypothetical situation ,my assumption turns out to be true,and I sell all the 40 shares which I have bought making an investment of Rs.10,000 on 4th day.
Then considering my all inclusive brokerage of .644%(in both legs):
My Net Profit =Rs.648.17(which is availableto me 2 days afterI have sold;considering my selling to be either on Mnday or Tuesday)
Effective period of investment=6days
Thus effective %monthly return=[(((648.17/9784.2)*100)/6)*30]%=33.1233%
Now ,I come to the profitability in option trading:
On 19th April, I buy 390's CALL of TISCO at a premium of Rs. 1/unit(LOT_SIZE=1350)
After 4 days ,my predction came out to be true.
It can be shown through an option clc that the option premium will now rise to approx.
2.6
here,my net investment=1350+697.52(Brok.)=2047.52
My net return (excl.Brok.)=2925.399(Brok.584.6)
Net Profit=877.87
%monthly return=214.374%!!!!!!!
UnBelievable!!! Who says out of money call transaction an ametureist work!!!Probably
it is the imaginative creation of a super professional!!!
{NB
on't believe that such transaction are always possible.Actually this type of call buying and selling is really Ameturistic.)
Actually a complete knowledge of Nifty movement and a good forsight can give a real good profit even in day trading in options.
This much for today only.
Regards,
joy_mitali