Help required on options

Request to explain this strategy which i got from icicidirect yesterday on 1Aug

Sell Aug Call 4500 @130

What is the next step I must take. I think i will receive a premium of about Rs.6400. but I am not clear on how to go about it.

hello Sumaant,
Selling the 4500CE @130 will give you a credit of Rs6500/- for every 100 nifty call options. However, your contract value will be Rs4,50,000/- and your broker will freeze a margin of 25% from your account and it will be subject to MTM viz mark to market losses if any.
I think the market is in a strong short term uptrend for 3-4 days and should touch 4650 on the nifty by tuesday. Therefore wait until it does and short the 4700CE at that point. Also do exit in about 3-4 days if your call is right. If it is wrong and the market goes up beyond 4700 then you might have to exit especially if MTM kicks in.
Hope you find this useful
Jaggi49B

ICICI says you can expect the market to tank (go well below 4500). So, they are asking you to sell a call option @130. The amount you get is Lot Size x 130 - brokerage. For NIFTY, lot size = 50, so you get ~6400. For MINIFTY, the lot size is 20 and you can calculate accordingly.

However, if you take the call, you need to deposit a certain amount of margin money with ICICI. Call up your relationship manager to ascertain the exact amount and terms.

If, the market goes up, you lose, as the call option's value increases, much higher than 130. And you would have to end up paying the difference (new price - 130) x Lot Size. And then there's the margin call from ICICI.

You have a couple of options once you have sold the call -- when the market has tanked sufficiently, you can square off, by buying a call. Or, if you expect that the market will keep going down till the end of August, you dont do anything. The option will be closed automatically on expiry day (28 Aug in this case) and you get to keep the premium. And yes, what works for you is that option value decreases with time, so as expiry comes nearer, chances of the call going up is less.

Selling a call is similar to buying a put, though, selling is riskier, you have limited profits (~6400) but unlimited losses. Read about options, before you even venture into this.

You may try these option books and write up :

http://www.ziddu.com/download/1299627/StepByStepLearning.doc.html

http://www.ziddu.com/download/1687328/obook.zip.html

Selling option is risky and certianly not advisable for beginners (I hope ICICIDirect has mentioned this in their recommendation). Options are leveraged instrument and by selling an option, the seller takes the obligation. Not worth taking that obligation of umlimited loss for small profit of 6k. You might be better off buying 4500 PUT where you maximum loss is equal to the premium paid for this PUT option (you can certainly cut your loss by squaring off the loss making position before expiry).

Happy Trading.

Sumaant, I checked ICICIDirect recommended strategy (in "F&O section" under the link "Derivative Strategy"). They are not suggesting to sell 4500 AUG call alone. Their recommendation is to Buy 4300 Call and Sell 4500 Call. In their suggestion the risk is mitigated by 4300 Call. So the strategy does make sense with potential reward/risk ration of over 2.7, provided market closes above 4500 by August end.

Happy Trading