IFCI 40 put

pokrate · #1 11th July 2008, 09:48 PM

Dearest members,
I am new to options. And for the first time I have bought a stock option. I have bought IFCI 40 put, as I think IFCI can go down to 35 levels.
Now if on Monday 14th July 2008, it goes to 35, what could be the option price. Today it closed at 4.05 . I want to know my profit potential in this trade.

AW10 · #2 12th July 2008, 12:18 AM

Options pricing is not straight forward. It is function of parameters like - time to expiry, price of underlying security, volatility, strike price of option etc.
My suggestion - to goto your borker's site and use the "option pricing calculator" to find out the theoratical price. Actual trading price in the market will still be very different from the calculated result.. but this calcuation will give you fair idea of the future price.

Happy Trading

pokrate · #3 12th July 2008, 12:50 AM

Thanks, but provide some illustration to beginners

AW10 · #4 13th July 2008, 07:08 AM

For the benefit of beginners..

I am explaining the process that I use..
1) Get the option calculator (using Black& Scholes model) Sharekhan's site. (Either exe or excel version is fine).
2) Remaining data for the option price can be obtained from nseindia DOT com --> Derivatives --> Get Quote section. Get the options quote for the stock under consideration. Click on the row for the option + strike price combination of your choice. Next page will give you the information about Annual Volatility and other Bid/Ask information.

Example of the Calculation Case – Assuming today is 11-July-08. Current price of IFCI is Rs. 39.8. Traders analysis result indicates that IFCI will reach Rs 35 by 18-July-08. So the trader selects to buy IFCI 31-Jul-08 PUT 40.
• Price of the underlying stock = 39.8
• Strike price = 40
• Annual volatility (%) = 131.8
• Time to expiration (days left) = 20 days (31-July minus 11-July)
• Dividend yield (%) = 40%
• Risk-free interest rate (%) = 9 %

On entering the highlighted values in the calculator, the option price of PUT is 5.27

Projected option price on 18-July, assuming stock drops to Rs 35, can be calculated by changing the “Time to Expiration” value from 20 to 13.
• Price of the underlying stock = 35
• Strike price = 40
• Annual volatility (%) = 131.8
• Time to expiration (days left) = 17 days (31-July minus 18-July)
• Dividend yield (%) = 40%
• Risk-free interest rate (%) = 9 %

On entering the highlighted values in the calculator, the option price of PUT is 6.96.
So the project profit is Rs 1.69 (6.96 minus 5.27 ) in next 1 weeks period.

Caution - (a) Actual price traded in market may differ from the calculated value. (b) Due to limited liquidity, there might be slippage resulting from Bid/Ask spread. (c) Trader needs to adjust the profit for brokerage and other charges..

Hope it is clear now.

Happy Trading.

masterjee · #5 13th July 2008, 10:40 AM

Quote:

Originally Posted by pokrate

Dearest members,
I am new to options. And for the first time I have bought a stock option. I have bought IFCI 40 put, as I think IFCI can go down to 35 levels.
Now if on Monday 14th July 2008, it goes to 35, what could be the option price. Today it closed at 4.05 . I want to know my profit potential in this trade.

PLug your numbers into a options calculator (there are many floating around in the web). And your questionswill be answered.
If you have metastock it is built into it.

m

optionstrader · #6 5th August 2008, 05:16 PM

Quote:

Originally Posted by AW10

For the benefit of beginners..

Example of the Calculation Case – Assuming today is 11-July-08. Current price of IFCI is Rs. 39.8. Traders analysis result indicates that IFCI will reach Rs 35 by 18-July-08. So the trader selects to buy IFCI 31-Jul-08 PUT 40.
• Price of the underlying stock = 39.8
• Strike price = 40
• Annual volatility (%) = 131.8
• Time to expiration (days left) = 20 days (31-July minus 11-July)
• Dividend yield (%) = 40%
• Risk-free interest rate (%) = 9 %

Hi i AW10,

How or from where do we find out the dividend yeild ?,

AW10 · #7 6th August 2008, 01:08 AM

In my explanation, I had assumed it to be 40%. Effect of this number gets nullified, to some extent, when u use the same number to calculate buy price, as well as sell price.
If you want to be precise, to you need to find out the dividend yield of NIFTY stocks somewhere (I have no idea where can we get this).. For individual stocks, you can this number is equal to the last dividend declared by the company.

The price given by this calculator will still be a theoratical price. And market has its own logic hence market price will be different from the derived number. I am happy to make some assumption and move on.
For prefectionists, please google on "Black–Scholes option calcualtor" and find out further details.

Happy Trading.

skarpio · #8 6th August 2008, 10:54 AM

@optionstrader:
Adding to what AW10 has already said:
1. Use the formula here to calculate dividend yield
2. Look up BOPM and a calculator for BOPM. This is the preferred model for American style options

Finally, somewhere on this board link to a free option pricing software was posted sometime back. I can no longer recall the name. But try searching. It should help.