How to make money by writing CALL option just before exiry

sethuramansid · #11 29th June 2006, 03:38 PM

Dear Vince and Other Senior members,

I am also new to this option trading. What is the different between buying an call option and writing call option? Please explain me on this. And also I heard that If we go short on option, on the expiry day, if we don't cover our short, then the system will cover the short automatilcally at 3.30. In that case, at what price the short will be closed. I.e. on last traded price or the difference between strike price and current price?

Let me explain the above case with the following example.

I go short on 3100 call option at some price. At the end of the expiry date, Nifty closes at 3130 and the option is traded at 25(say). Now What happens? Whether the difference between strike price and closing price of 30 will be price the system will cover the short or traded price of 25 will be covered?

abhinkoi · #12 29th June 2006, 11:18 PM

Quote:

Originally Posted by Agilent

My broker once advised me (when I felt the market was overvalued and wanted to write some calls) to buy puts instead.

In many ways the latter is a less risky. (Shorting is, in thoery, 'infinitely' risky because if forced to cover, the security may be simply unavailable)

What are members' views?

AGILENT

PS Abhinav : Notwithstanding my preferences above, I wrote some more calls today, nifty June 3100. After all , what are the odds nifty will gain>100 points tomorrow ?

Day after, if you are in Blore, I can treat u to dinner !

Thanks for your reply Agilent...
Yes even I made some money by selling 3100 CALL at 17....and already tank fulled my small santro

I would love to be treated in Bangalore but just 3 months back I left Bangalore and I am back to Delhi my native place.

Surely will get a treat from you if I reach there sometime in future

Thanks again...
Pls keep sharing the secrets of Options trading...Always !!!!!

abhinkoi · #13 29th June 2006, 11:23 PM

Quote:

Originally Posted by vince

Hi spiderman,

You can buy/ sell a futures contract pretty much the same way you buy /sell stocks.
Commissions are negotiable with the brokers although icici brokerages are very much on the higher side.

Margins vary between 10 to 18 % for the nifty from broker to broker, and are much higher for stock futures. You could check with icici what are their margin requirements. Margin calls are made only if there are insufficient funds in your account or your position is squared off.

I would not recommend icici for futures trading since they do not offer live streaming quotes and traders have also faced log on problems , and frequent disconnections among other problems. you could go thru the brokers thread to get some feedback on other brokers as well as icici. However its your call.

I found Indiabulls good. You can see live refreshing of rates if you have a good bandwidth internet at home.

Also I am satisfied with the brokerage as well however margins are not as good as it should. Brokerage I am paying is .05% for Intraday as well as Nifty options and .35 for the delivery.

Please compare with any other brokerage houses and decide.

happy trading !

Agilent · #14 30th June 2006, 10:24 AM

Quote:

Originally Posted by Agilent

PS Abhinav : Notwithstanding my preferences above, I wrote some more calls today, nifty June 3100. After all , what are the odds nifty will gain>100 points tomorrow ?

Eeeks , that was close ! I had posted that on 28th .. Got away in the nick of time yesterday, when both my sold calls expired worthless ...

today is another story ....phew !!
AGILENT

vince · #15 30th June 2006, 10:43 AM

Quote:

Originally Posted by sethuramansid

Dear Vince and Other Senior members,

I am also new to this option trading. What is the different between buying an call option and writing call option? Please explain me on this. And also I heard that If we go short on option, on the expiry day, if we don't cover our short, then the system will cover the short automatilcally at 3.30. In that case, at what price the short will be closed. I.e. on last traded price or the difference between strike price and current price?

Let me explain the above case with the following example.

I go short on 3100 call option at some price. At the end of the expiry date, Nifty closes at 3130 and the option is traded at 25(say). Now What happens? Whether the difference between strike price and closing price of 30 will be price the system will cover the short or traded price of 25 will be covered?

You pay 30 on expiry.

aca_trader · #16 30th June 2006, 11:51 AM

Quote:

Originally Posted by Agilent

Eeeks , that was close ! I had posted that on 28th .. Got away in the nick of time yesterday, when both my sold calls expired worthless ...

today is another story ....phew !!
AGILENT

That why I pointed out that for writing calls one needs deep pockets so that a few transactions against him don't affect the trading capital in an adverse manner. Especially writing naked calls is very risky. Compare what you would have lost and what u earned to know the risk:reqard ratio. Elder mentions a fund which lost profits of 20 years in one day writing naked calls.

But still writing calls is profitable over the long run.

Best Regards,
--Ashish

Agilent · #17 30th June 2006, 11:58 AM

Quote:

Originally Posted by aca_trader

That why I pointed out that for writing calls one needs deep pockets so that a few transactions against him don't affect the trading capital in an adverse manner. Especially writing naked calls is very risky. Compare what you would have lost and what u earned to know the risk:reqard ratio. Elder mentions a fund which lost profits of 20 years in one day writing naked calls.

But still writing calls is profitable over the long run.

Best Regards,
--Ashish

Interesting factoid , Ashish.... wonder if u can give some reference so one can read more on this topic

AGILENT

aca_trader · #18 30th June 2006, 12:42 PM

Quote:

Originally Posted by Agilent

Interesting factoid , Ashish.... wonder if u can give some reference so one can read more on this topic

AGILENT

Sorry Agilent, I am not into Options Trading hence can't help much in the matter at the moment from a trader's perspective. Ashwani Gujral has devoted a chapter on writing covered calls which I did find interesting.
I think Vince & Ivanboskey can help better on this matter.

I personally feel that it'ld serve good purpose if one can study John C. Hull's Options, Futures & Other Derivatives to understand the factors behind options (ofcourse it does not help immediately in trading but it sought as the Bible on Derivatives) and then go for trading education. Trying his Derivagem Software http://www.rotman.utoronto.ca/~hull/ can give a basic feel of how to use Computer Assisted Techniques in valuation of options.

Best Regards,
--Ashish
[I have some E-Books on options which I can send to you but choosing the pearl among them is something you will have to do as I have not read any of them so far.]

abhinkoi · #19 17th July 2006, 09:43 PM

Can anyone please tell me why there is lot of difference between the same value CALL option for different months...i.e. 3100 CALL for July is at 23 and 3200 CALL for August is at 86...Would it be a good idea to SELL August CALL?

Agilent · #20 17th July 2006, 10:18 PM

Quote:

Originally Posted by abhinkoi

Can anyone please tell me why there is lot of difference between the same value CALL option for different months...i.e. 3100 CALL for July is at 23 and 3200 (3100 ?) CALL for August is at 86...Would it be a good idea to SELL August CALL?

There is a concept called 'time value' of an option (read any book or Google)

That will explain why the Aug call is costlier than the July call (with the same strike price)

In simple terms, buyers of Aug calls (3100) have more time (before expiry) than buyers of July calls (3100). So they have a higher probability of making money. Hence market forces demand a higher price. Got it ?

AGILENT

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