Covered option - risk and reward.

T

takechance

Guest
#1
#1
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.
 
I

ivanboesky

Active Member
#2
#2
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.
 
T

takechance

Guest
#3
#3
ivanboesky said:
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.
Click to expand...
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.
 
T

takechance

Guest
#5
#5
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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