Options help

#1
I had a query on options. For example I buy a Tata motors call option for strike price 220 for expiry of 23 Feb 2012. Now since the strike price is high, assume that the price just reaches 218 or so never reaching the strike price. But on 15 Feb it breaks out and reaches 235.

So now the option is in the money. Now since I have only 8 days to expiry, how do i square off or sell this option. Since close to expiry few people will buy it. Also if I wait till expiry there are high chances the stock may again go below 220 thus making the option out of the money.

This is a hypothetical case but I just want to understand the exit strategy in any case. Thanks for the help.
 
#2
Hello,

any one out there who can help me with option exit strategy above. Earlier used to get a reply in a day at most. The Option Gurus and Experts seem to be busy.........:confused::sos:
 

iamroopak

Active Member
#3
if u want to square off the option u bought. just sell the same option u bought. thats all. but be careful to sell exactly the same option u bought..

option pricing is complex.. its difficult to explain here.. but in simple terms: when the stock price reaches 235, the call option wud be selling at least for 15 bucks(235-220). generally, the more in the money options are, the costlier they r at a particular point of time. similarly, the more out the money an option is, the cheaper it wud be at any point of time.

but i suggest u to stay away from options.. learn first to make money using no-leverage. i am a profitable trader, but still i havent traded a single option, and looks like i will not in 2012 too..
 
#4
Hello,

I have lots of experience making money using no leverage. I have had various investments in the past which have made some amazing returns. I do know abt In the money and out of the money options.

If lets say you are investing now in something like a metal stock which has chance of going up but there is also risk and uncertainty in market so in such a case nifty put option would help me along with the investment in stocks. If Nifty were to fall, the metal stock would fall too but the option would make money. My only concern is that the way markets are so volatile, before the option expires it may very well return to the same level or at the money thus erasing the profits. I do not want to write an option to protect the existing option. I would effectively be hedging a hedge and I do not want to make it too complex. Writing an option would need more funds and I do not have that much money to do it.:sos: Maybe someone who has traded options can help me out Plz.........:confused:
 
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gunsho

Well-Known Member
#5
If lets say you are investing now in something like a metal stock which has chance of going up but there is also risk and uncertainty in market so in such a case nifty put option would help me along with the investment in stocks.
This is hedging. But hedging is like buying insurance. We get benefit only when bad things happen. Otherwise premium is just an expense.

If Nifty were to fall, the metal stock would fall too but the option would make money. My only concern is that the way markets are so volatile, before the option expires it may very well return to the same level or at the money thus erasing the profits.
Well your metal stock would have also gained in price right? I could not clearly understand the goal we are trying to achieve here. Please explain, our aim is to hedge or earn money from the options also?

  • If our aim is to hedge, then we can see it as a insurance premium.
  • If you want to keep the money from put option when the metal stock is falling, then you can sell the option (as already mentioned) to close the position. But by selling, you are removing the hedge (assuming that metal stock will go up hereafter).

Maybe someone who has traded options can help me out Plz.........:confused:
There are lot of people who have traded options here. If you can explain clearly what is our goal here (hedging/earning from options), then it would enable others to give better answers. If the only question is on how to close the option which was bought before, selling would close the position.
 
#6
Thanks, the primary objective is to hedge existing portfolio and as I am more comfortable with options, use it to make money later.

I had one more small query which is related. If selling the option purchased is the exit strategy (not writing a put option), then would there be sufficient liquidity in the option so as to dispose it off? Also as it nears expiry, it is likely to lose time value but the chances of it being bought also diminish with time. So in that case if there are very few days left to expiry then waiting for expiry would be the best exit? Please tell me if this is the right strategy and thinking.

I do not want to write an option as for someone with no experience of options trying to exit an option by writing an option, it just seems overwhelming......

I really appreciate the reply and the clarity provided by you guys:thumb::thumb:
 

gunsho

Well-Known Member
#7
Writing an option is nothing but selling the option without buying it. There are more information about option basics available across web.

If the primary objective is hedging, then by closing the option you have bought, you are removing the hedging. That beats the primary objective?

Liquidity will be less if strike price is far away from market price. In order to see how your strategy works, Options oracle will help with numbers. It would be meaningful to discuss strategy with those numbers.

Thanks, the primary objective is to hedge existing portfolio and as I am more comfortable with options, use it to make money later.
<snip>
I do not want to write an option as for someone with no experience of options trying to exit an option by writing an option,
Couldn't understand your level of experience with options. If you are novice to options, please make sure you test your strategy in paper for all possible market conditions. Many have lost money in options since basics are not clear. Trade safely!
 
#8
This is hedging. But hedging is like buying insurance. We get benefit only when bad things happen. Otherwise premium is just an expense.
Well said, when writing options, think of yourself as someone who is selling insurance. 90% of options expire worthless.
 
#9
Hello,

:clapping:

One more thing please. Is there any book I can read which is for novices and new investors to options. Sort of like Options for Dummies. I had previously read a book about Options which was recommended by a member titled: 'The Bible of Options Strategies' by guy cohen which described option strategies in detail. But I need a more basic approach so that I do not make any basic mistakes while dealing in options later in real life.

Regards
 

gunsho

Well-Known Member
#10
Hello,

:clapping:

One more thing please. Is there any book I can read which is for novices and new investors to options. Sort of like Options for Dummies. I had previously read a book about Options which was recommended by a member titled: 'The Bible of Options Strategies' by guy cohen which described option strategies in detail. But I need a more basic approach so that I do not make any basic mistakes while dealing in options later in real life.

Regards
Something very basic than what is in that book, my suggestion would be to follow Dan's recently started thread. It covers the basics nicely.

http://www.traderji.com/options/66266-option-trading-danpickup.html
 

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