SOLD NIFTY call3400,Tell me which way to go? Nifty options

rvlv · #1 4th September 2006, 08:14 AM

gENTS,

pLEASE ANSWER MY QUESTIONS,acept my thanks in advance.

case-1
A friend of mine has enquired about this situation.

As on Last trading day, 2sep,say
I SOLD a Call option,one lot of Nifty 3400 strike,28sep expiry price for a premium of 103.5 rupees.

nIFTY spot was at 3433 at closing.
-----------------------------
The charging by broker--how is it done?
margin at 10%
brokerage
premium
The difference between 3400 strike price and current nifty 3432,ie 32 points surely gets charged at 32*100=3200 per 1 lot
-----------------
How can I make a profit?

If I buy back the Call option,strike3400, when premium drops to 90 rupees,
what will get?
just difference in premium?
prev sold premuim=103.5
now buy same call back at premium =90
difference=13.5,multiply by 100=get 1350 for 1 lot.
I gain 1350 rupees. correct?
What about the difference in nifty,the amount they collect at 3200?
will I get it back as I buy the call?

Under current market conditions,
what would be the right call strike price?
Nifty spot=3433
CALL to Buy =3450,slightly higher than current nifty

--------------------
How to make most of selling 3400 call of nifty options?

wHAT ABOUT CONSIDERING BUYING A PUT OF 3450? OR 3400?
IDEAL thing would be buy below current nifty, ie buy put,sept 28 expiry at 3430?
If mkt goes below 3430, i gain.
otherwise WOULD I loose all AMOUNT I PAID FOR THE PUT?

pLEASE COMMENT.
Thanks for your time.
rvlv

SGM · #2 4th September 2006, 09:39 PM

Quote:

Originally Posted by rvlv

case-1
As on Last trading day, 2sep,say
I SOLD a Call option,one lot of Nifty 3400 strike,28sep expiry price for a premium of 103.5 rupees.

nIFTY spot was at 3433 at closing.
-----------------------------
The charging by broker--how is it done?

margin at 10%

brokerage

premium

Hello rvlv

When you sell a Call option, the premium is credited to your account. So you will earn all of 103.5 * 100 when you sell the call option. Now as you are liable to pay the buyer (thru u r broker) if on day the of expiry (28 sept) nifty closes above 3400 (your strike price) the broker will take margin from you.

Quote:

The difference between 3400 strike price and current nifty 3432,ie 32 points surely gets charged at 32*100=3200 per 1 lot

Normally you do not have to pay any difference on daily basis, as long as your margin is adequate. If on day of expiry the price closes above 3400 you have to pay the difference. For e.g. closing of 3550 will put you back by 150 points.

Quote:

-----------------
How can I make a profit?

If I buy back the Call option,strike3400, when premium drops to 90 rupees,
what will get? just difference in premium?
prev sold premuim=103.5
now buy same call back at premium =90
difference=13.5,multiply by 100=get 1350 for 1 lot.
I gain 1350 rupees. correct?
What about the difference in nifty,the amount they collect at 3200? will I get it back as I buy the call?

You are right about the above; if you are able to buy back the Call option at lower rates you make a profit minus brokerage on both turns. The difference in nifty does not matter, as it will already reflect in the price of call option. The other things that affect it will be days to expiry (which will work to your favor, as less days remaining) and volatility.

Quote:

Under current market conditions,
what would be the right call strike price?
Nifty spot=3433 CALL to Buy =3450,slightly higher than current nifty

--------------------
How to make most of selling 3400 call of nifty options?

This is basically a directional call, if you are sure that the rates on expiry in September will not be more than 3500 (3400 ur SP + 103 premium earned - brokerage aprox 3 pnts) then it will be a safe bet for you.

Another option you have is after selling a call option, if the trend is up instead of down or sideways defend the position by going long (buying nifty futures) at a pre- defined rate, lets say 3450 (kind of a stop loss) now if the markets trend up and close at 3650 on expiry you protect a part of premium as settlement price of both option and future will be the same.

Hope i did not add to the confusion

Regards
Sanjay

rvlv · #3 5th September 2006, 06:24 AM

Hi SANJAY

Thanks for answering all my queries.
Some things I understand are

Unless we make a minimum 5 points gain,the brokerage eats away the gains.
One point is 100 rupees in futures, the brokerage is roughly about 500 rupees for one buying and selling together.
1.Once we found that market is going against us,the best thing is get out with a limited loss using stoploss a max 10 points.2.In Indiabulls,It is good to know the average brokerage for 1 lot buying and selling comes to about460 rupees.So one should remember- Breakeven stop is about 5 points away

Always hedge selling a call with a buying of Nifty futures, or buying a Call option with selling a Nifty futures.of course one must try to use a minimum number of lots,equal on both sides of hedging. That is surely a good way to minimise risk.

There are situations in futures and options which dictate limited profit and unlimited risk. these to be highlighted and one should go with strict stoploss when travelling in the unlimited risk direction.
----------------------------------
The problem of OPTIONS
1)Choosing Right strike price and 2)choosing right Premium to pay

I understand
If current Nifty spot is 3480, you think of selecting strike price of nearest round figure close to 50,on the higherside of 3480,
ie choose a call option with strike price of 3500
If the market bias is upwards.

iF MARKET BIAS IS TOWARDS GOING DOWN,then if current nifty is 3480,you go to choose a strike price below nifty, close to nearest 50,ie 3450 strike price.
choose a PUT option with strike price 3450

2) paying right premium
sharekhan option calculator seems to be best.

http://www.sharekhan.com/articles/sh...calculator.xls

for example
If I feed a current nifty spot value at 10am on 4thsep,say 3435
strike price=say 3450,days to expire for 28sep2006 contract=28-4=24
,assume these things, Risk free interest rate=9%,Annual Volatility=45%,dividend yield %=0
then the calculator gives
Fair price of call option=160.61
FAIR PRICE OF A PUT OPTION=155.25

and you see the live prices Optidx-Nifty-28SEP2006-3450-CE is going at 90 rupees.
The price seems ok jump in and take a ten point profit

There are other things in the calculator.
I have no idea except the fact goes options are very time sensitive and decay happens.
SOME ONE TOLD ME Never buy or sell options on a Friday
I need to find out yet.why?

Thanks again to Sanjay for his fast and prompt response and for the step by step answers that go long way to help all other learners

HAPPY OPTION TRADING
rvlv

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