Options basic question

Hi All,

I am newbie to Options trading. Let me quote an example.

Date and time: 14th Jan 2015 Time: 9 55 AM

At this time, the NIFTY Jan 29 2015 8400 CALL is trading at 71.8.
The NIFTY value is 8312.

Following are my queries:

1. Suppose I buy 1 lot that is 25, I have to pay 25 X 71.8 = 1795. Is this correct?, my max loss will be 1795.
2. My brokerage is 0.05%. Can I square of today itself at 72? So that I can make profit even though Nifty does not cross 8312.
3. Technically to make profit, it should cross 8400 + 72, right?

Thank You!

yes

yes
this is true at the day of expiry. Else, you are essentially trading on premium.

Thanks com.

>> this is true at the day of expiry. Else, you are essentially trading on premium.

Suppose there are 5 days to expiry and NIFTY is at 8400. Premium may be 100 and I am in profit of (100 - 72) X 25. But, if there are no buyers and on expiry the NIFTY is at 8400, I will make a loss right?

Thank You!

with 5 days to expiry and nifty at 8400, your call strike of 8400 may not be quoting at a premium of 100!
Because there is something called as theta i.e time value which decreases with time.
you paid a premium of 72 for 8400 call when nifty was at 8312, not even above near your strike.
this 72 is pure time value. and if nifty in the month has just reached 8400 with 5 days left to expire....this 72 will slowly evaporate to maybe 40-45 (depending of vola) anyways, theta plays an imp role.

for second question :
liquidity is not an issue for nifty.
If nifty closes at 8400 on expiry. your loss is rs.72, why? your Strike is 8400 and nifty close is 8400, hence =0.

please invest some time in further study - nseindia has good reading material, this forum has good stuff, youtube etc.

all the best.

Thanks com. I understood your point.

1. So if it is quoting at 45, If I sell my loss will be (72-45) X 25 = 675, right?
2. If I don't sell it, my loss will be exercised and it will be > 1795 which includes STT trap, right? so better sell it.
3. A happy question :clap: what will be premium if Nifty will be at 8600?

To conclude,

1. It's always better to sell and square off option than exercise it.
2. It's always better to buy options at starting of the month so that we get more time and close it soon than wait till expiry, right?

Thank You!

correct.
STT trap happens with your option expires ITM (in the money); in your case, if NIFTY closes by above your strike of 8400 by even .50 points, then yes, there's STT trap.
If your question is on the day of expiry then its simple = nifty close minus strike price; 8600-8400 = 200.

only if the option expires in the money. Else, let it expire worthless and save brokerage.
depends on your intended strategy. Assuming you have a directional play in mind, then the answer is yes. also remember, at start of month the premium would also be high.
Once you buy an option, the anticipated move should happen soon so as to have good rate of return on option premium.

else, time value slowly eats away all your premium paid.

Thanks comm. I also understood more things from below link:

http://www.nseindia.com/invest/resources/download/prs_derivatives.pdf

Thank you for answering all my queries. :clapping:

thank you for providing the link. didn't know it existed!

:thumb:

Dear Com,
Many thanks for your replies. I have a few related questions.(or rather stupid newby questions)
In the current series let us say I sell CE 8600 tomorrow at near its day high.
Now it is highly unlikely, though it can never be ruled out completely, that CE8600 may never come in money.
So (1.) If I do not square off by buying at 0.05 on January 29 will it be OK and I can keep the premium I get by selling.
(2) I understand the risk associated with selling, but say if I had sold deep out of money (CE 8700) at the start of the Jan series I could have made some money, baring 3/4 days in between when it had jumped up only to come down again.
(3) Can I apply selling strategy to say CE8700 February expiry now and make sure I square it off before budget just to play very safe?

I checked data from around 26-9-2013, expect in 26-9-2013 expiry which saw Nifty jump by 706 points most months do not see even a 500 point increase.
I am ready to share a pdf of my research (rather childlike maybe) here but do not know how to or if it would be of any interest to anyone.

Regards.

STT scenario does not come when you sell first. you pay STT on your sell leg, so you can let your sold option expire worthless.
this is where the problem is...any good news from govt can put a spike in index and its options. if you can actively manage your position and have a matrix for all possible/conceivable scenarios, then go ahead with your plan.
the temptation of getting more premium by going into next month series has its disadvantages as well...you are giving more time for the option. What is 8700 for jan series is just 2 weeks; what 8700 for feb series is 4-5 weeks.
if the run upto the budget is marked by spikes, then you are in trouble. As you know, the market ran up even before election results were due, the same thing could happen here.

agreed. just make sure that you start off small and keep tight SL or better still, go for credit spread so that you know your max risk.


upload the file on to some file sharing website/dropbox and share url if you think the contents would help our members.

thanks.
all the best.