Covered option - risk and reward.

takechance · #1 20th October 2006, 11:59 AM

Yesterday I sold 1 lot REL 1200 Nov Put @35/- and bought 1 lot REL 1110 Nov Put @17/-.

So the net credit should be 18/- x 300 (less brokerage). Right?

Now can anyone calculate please whats the maximum risk and maximum return for me in this trade?

I think maximum return is if REL closes above 1200 on 30th Nov and maximum risk is if it goes down to 0.00 on Nov'30 (theoritically).

Thanks.

ivanboesky · #2 20th October 2006, 04:21 PM

Almost right...
Your maximum reward will be Rs. 18 if REL closes at Rs. 1200. In that case, both puts expire unexercised. You keep the Rs. 35 premium and lose the Rs. 17 premium, for a net profit of Rs. 18.
Your maximum loss is Rs. 72, if REL closes at Rs. 1110. In this case, the 1200 put is in the money by Rs. 90, and the 1110 put expires unexercised. Subtract the Rs. 18 premium (net) you received, and your max loss is Rs. 72.

takechance · #3 20th October 2006, 06:07 PM

Quote:

Originally Posted by ivanboesky

Almost right...
Your maximum reward will be Rs. 18 if REL closes at Rs. 1200. In that case, both puts expire unexercised. You keep the Rs. 35 premium and lose the Rs. 17 premium, for a net profit of Rs. 18.
Your maximum loss is Rs. 72, if REL closes at Rs. 1110. In this case, the 1200 put is in the money by Rs. 90, and the 1110 put expires unexercised. Subtract the Rs. 18 premium (net) you received, and your max loss is Rs. 72.

Thank you very much. My calculation also told me same. So if the max risk is 72x300 = 21600/- why does my broker keeps a margin of about 60,000/-. They mentions there is an exchange requirement of 34,800/- and the rest is daily margin etc etc. I contacted them with my figures but no reply so far.

Any active Indian options trader can throw some light on this?

Regards.

ivanboesky · #4 23rd October 2006, 09:59 AM

Not sure how SPAN adjusts for it, but the margin should definitely be lower. Speak to your broker and get the margin checked.

takechance · #5 1st November 2006, 10:57 PM

I squared off the 1200 put at Rs.7.00 today. VOILA.

If the market crashes this month anytime I will sell the 1110 put also making more money.

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