Correct me if I'm wrong about options

[Ronith12]

I just started learning about options. I just need someone to confirm some of my knowledge about option writing.
1. Selling a call option: If we are predicting that the price of the index/stock will not go past a certain price(strike price) which is above the current price, we sell a call option at the strike price and receive a premium from the call buyer. If the price moves upwards and crosses the strike price before expiry of the contract, the buyer will exercise his option and buy the contract at a price higher than the strike price. Here, for every call buyer of the same contract, net loss of the call seller= (Market Price at which the buyer exercises his option-Strike Price -Premium paid by the buyer).
2. Selling a put option: If we are predicting that the price of the index/stock will not go past a certain price(strike price) which is below the current price, we sell a put option at the strike price and receive a premium from the call buyer. If the price moves downwards and crosses the strike price before expiry of the contract, the buyer will exercise his option and buy the contract at a price lower than the strike price. Here, for every call buyer of the same contract, net loss of the call seller= (Strike Price - Market Price at which the buyer exercises his option-Premium paid by the buyer).

Please confirm if the above mentioned points are right or not. Thank you.

 

[sanju005ind]

Yes. Theoretically that is correct. The exercise part is for American options. We here in the Indian market use European options where exercise happens at expiry and it is cash settled. Please do not create new threads for each queries. You can use active threads related to the subject or use the General trading chat thread.

 

[Ronith12]

Yes. Theoretically that is correct. The exercise part is for American options. We here in the Indian market use European options where exercise happens at expiry and it is cash settled. Please do not create new threads for each queries. You can use active threads related to the subject or use the General trading chat thread.

There wasn't a thread for this particular query.

 

[Ronith12]

Yes. Theoretically that is correct. The exercise part is for American options. We here in the Indian market use European options where exercise happens at expiry and it is cash settled. Please do not create new threads for each queries. You can use active threads related to the subject or use the General trading chat thread.

Also, while selling a call/put option, can the strike price be both greater or smaller than the current price?
Also, if we call sell a call option for a strike price below CMP, what is the difference between buying a put option and selling the call option for that particular strike price.
Similarly, how to decide if we want to buy a CALL or sell a PUT if we are bullish ?
I'm sorry but there's no thread explaining this specifically.

 

[sanju005ind]

Also, while selling a call/put option, can the strike price be both greater or smaller than the current price?
Also, if we call sell a call option for a strike price below CMP, what is the difference between buying a put option and selling the call option for that particular strike price.
Similarly, how to decide if we want to buy a CALL or sell a PUT if we are bullish ?
I'm sorry but there's no thread explaining this specifically.

That's when volatility comes into play. When volatility is high you sell an option and volatility is low and you expect it to increase then you buy an option.

 

[Loss_Lover]

@Ronith12,
I think by now with your Google searches you might have already come across this book. It contains answers to all your questions in regards to Option Writing and much more. Please read it thoroughly.

 

[pannet1]

zerodha varsity has nice tutorials.

what i did not know as a beginner was ...

when you sell an option you cannot earn more than the premium you received and its difficult to hold on to your winning position till expiry because it goes through lot of price swings. if you are 100% correct and the sold option starts to loose the value (i.e. you are winning), the profits were not enough and you have a tendency to exit.

one could loose unlimited money when selling options,

well options are good hedge tools and best when done with another instrument (option, future or stock).

 

[SarangSood]

zerodha varsity has nice tutorials.

what i did not know as a beginner was ...

when you sell an option you cannot earn more than the premium you received and its difficult to hold on to your winning position till expiry because it goes through lot of price swings. if you are 100% correct and the sold option starts to loose the value (i.e. you are winning), the profits were not enough and you have a tendency to exit.

one could loose unlimited money when selling options,

well options are good hedge tools and best when done with another instrument (option, future or stock).

There is only one certainty in stock market that all the otm options will expire 0. We just need to keep our strangle otm all the time. There are various strategies that can help us carry our positions to protect from gap openings. If we can do all of this then the job is pretty straight forward.

 

[Loss_Lover]

one could loose unlimited money when selling options,

well options are good hedge tools and best when done with another instrument (option, future or stock).

There is only one certainty in stock market that all the otm options will expire 0. We just need to keep our strangle otm all the time. There are various strategies that can help us carry our positions to protect from gap openings. If we can do all of this then the job is pretty straight forward.

This works for me on liquid Stock options wherein the underlying is generally not that volatile and there is no nearby Earnings. It does not apply on Indices. Every expiry risk-less 2%-5% return (at times even 7%), no high hopes just decent passive return. However, capital intensive but guaranteed profit irrespective of Market direction or choppiness.

(1) Bull Call Spread around ATM: Buy Lot(s) of the strike just ITM + Sell same no. of Lot(s) the strike just OTM;
(2) Sell 2 times the Lot unit(s) used in (1) of far OTM Call strike preferably above a Strong resistance but not more or less than 10% away from ATM.

Most importantly, after applying (1) and (2) one must get +ve credit at any cost after all Brokerage and Taxes. Goal is to keep this credit (preferrably increase it) no matter what.

Adjustments:
(1) If price goes above the Sold just OTM Call strike but well within the far OTM Call - No action;
(2) If price goes below the Sold just ITM/OTM strike Calls - No action;
(3) If price rapidly surges, gets ready to probe the Sold far OTM Call strike and breaches the proximity by 1%-2% from the far OTM Call strike - Cover the far OTM sold Call position and Sell double or treble the Lot(s) of initially sold far OTM Call to just the next far OTM Call strike; so as to negate the debit of covering the initial far OTM Call position by the premium credit of the newly sold just next strike to the far OTM Call position;
(4) Repeat (3) if price again surges to the newly sold far OTM Call.

As you can see No.3 adjustment and if needed No.4 adjustment(s) to follow would require more margin as you are required to make-up for the loss occurred by covering your previous far OTM Call with new credit. If one fails to adjust during scenario # 3 because of margin shortage, then it will be a huge loss. Otherwise if one implements 50% of his capital to begin with and keeps another 50% liquid to counter scenario # 3, then let the stock go as high as it wants, you just keep on adjusting till expiry or until Stock starts correcting from a Resistance level.

Entry: Last week of this current month expiry for next month contracts to capture in good credit;
Exit: If 4%-7% achieved within 1-3 weeks, otherwise a day or two before expiry.
Preferred Direction: Let the stock price plummet as much as it wants, no worry as the loss would be limited to the bought Call only after the initially received +ve credit and, moreover, we could always bring down our far OTM Call strike in order to increase profitability in such scenarios. However, maximum profit comes during choppy mild uptrend as your bought Call retains some intrinsic value, and because of non-volatility, and thetha-decay all your sold OTM strikes loses value.
Capital required: At least 5L, the higher you go, the easier it becomes. However, only 50% is to be deployed for position(s) and the remaining 50% must be kept cash (or invested into LiquidBees) to protect the position when and if required.
Add-on thought: Never exit or adjust the initial Bull Call Spread. All adjustments (either up or down) are to made on far OTM Call strike.

 

[Ronith12]

I had one more doubt.
Option writing can be done at a strike price which is both either below or above the current market price while option buying can be done only in one direction,.ie. if I want to buy a CALL option, I'll buy it at a strike price greater than the current price, but if I want to write one, I can do it at prices both higher or lower than CMP.
Similar thing for PUT options.
Is this right?