cover calls-regular income from the stock market?

[Agilent]

il work this out right away but can u explain the term bid offer spreads? did u mean the difference between the bid and the ask price?

Bang on .. friend

For example see the best bid/offer quote for Nifty July Call 3090
Best bid abt Rs 64 ... best offer 145

So if u buy this call and sell it a second later, u lose 81 bucks PLUS brokerage ... !

Of course spreads are much lower for 'round value' strike prices .. eg 3100, 3050 etc .. but still

Like Vince said, try do that mock trade I had suggested... and then tell us what u feel

Rgds
AGILENT

 

[swagat86]

example
STOCK NAME : TISCO
LAST TRADE PRICE 525.00
ON JULY 10 IT OPENS UP AT SAY 524
AT 1 O CLOCK I FIN THAT ITS TRADING AT 520

I PLACE I BUY ORDER @ 520
SELL ORDER(SL ORDER) @ 520
IN BOTH CASES THE QUANITY IS 675
BOTH GET EXICUTED

NOW I SELL TWO OPTIONS
1) OPT-TISCO-27-Jul-2006-520-CA Premium Value : 19,237.50
2) OPT-TISCO-27-Jul-2006-520-PA Premium Value : 16,875.00

AT 3.28 PM
I QUICKLY SQAURE OFF MY POSITIONS IN CASH MARKET
ONCE DONE WITH I EVEN SQUARE OFF THE OPTIONS

NOW LETS FIND THE p/L
TOTAL GAIN FROM THE PREMIUM FRONT 36112.5
BROKERAGE @ 0.05%
IN CASH MARKET 351000*0.05%=175.50
SINCE THERE ARE GOIN TO BE 4 TRANSACTIONS AND FOR SIMPLICITY I TAKE IT AS
17.5.50*4=702
NOW LETS SUPPOSE TWO SITUATIONS

STOC PRICE GOES DOWN TO 510
BEING A SELLER OF THE PUT
I WILL HAVE TO PAY 675*10=6750
THIS WILL BE MITIGATED WITH THE SELL ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE CALL OPTION WONT BE AFFECTED
I WILL INCUR A LOSS OF 2% THIS IS PAYABLE FROM THE CALL OPTION PREMIUM
WHICH IS RS 16,875.00 (WHICH IS 4.80% OF THE LOT VALUE, CAN ACT AS A S.L)

STOCK PRICE GOES UP TO 530
BEING A SELLER OF A CALL IM ELIGIBLE TO PAY 6750
THIS WILL BE MITIGATED WITH THE BUY ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE PUT OPTION WONT BE AFFECTED
I WILL INCUR A LOSS OF 2% THIS IS PAYABLE FROM THE PUT OPTION PREMIUM
WHICH IS RS 19,237.50 (WHICH IS 5.50% OF THE LOT VALUE, CAN ACT AS A S.L.)


Iv been tracking the volatility of stocks and tata steel has a volatility of around 5%
And vince as i make this effort im also redaing a option basics book right now.
Important thing wat i feel is that i had something in my mind. and i shared that with u guys.
u are expert im a novice. But il make sure i leran it all out soon.
Cheers

 

[Agilent]

example
STOCK NAME : TISCO
LAST TRADE PRICE 525.00
ON JULY 10 IT OPENS UP AT SAY 524
AT 1 O CLOCK I FIN THAT ITS TRADING AT 520

I PLACE I BUY ORDER @ 520
SELL ORDER(SL ORDER) @ 520
IN BOTH CASES THE QUANITY IS 675
BOTH GET EXICUTED

NOW I SELL TWO OPTIONS
1) OPT-TISCO-27-Jul-2006-520-CA Premium Value : 19,237.50
2) OPT-TISCO-27-Jul-2006-520-PA Premium Value : 16,875.00

AT 3.28 PM
I QUICKLY SQAURE OFF MY POSITIONS IN CASH MARKET
ONCE DONE WITH I EVEN SQUARE OFF THE OPTIONS

NOW LETS FIND THE p/L
TOTAL GAIN FROM THE PREMIUM FRONT 36112.5
BROKERAGE @ 0.05%
IN CASH MARKET 351000*0.05%=175.50
SINCE THERE ARE GOIN TO BE 4 TRANSACTIONS AND FOR SIMPLICITY I TAKE IT AS
17.5.50*4=702
NOW LETS SUPPOSE TWO SITUATIONS

STOC PRICE GOES DOWN TO 510
BEING A SELLER OF THE PUT
I WILL HAVE TO PAY 675*10=6750
THIS WILL BE MITIGATED WITH THE SELL ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE CALL OPTION WONT BE AFFECTED
I WILL INCUR A LOSS OF 2% THIS IS PAYABLE FROM THE CALL OPTION PREMIUM
WHICH IS RS 16,875.00 (WHICH IS 4.80% OF THE LOT VALUE, CAN ACT AS A S.L)

STOCK PRICE GOES UP TO 530
BEING A SELLER OF A CALL IM ELIGIBLE TO PAY 6750
THIS WILL BE MITIGATED WITH THE BUY ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE PUT OPTION WONT BE AFFECTED
I WILL INCUR A LOSS OF 2% THIS IS PAYABLE FROM THE PUT OPTION PREMIUM
WHICH IS RS 19,237.50 (WHICH IS 5.50% OF THE LOT VALUE, CAN ACT AS A S.L.)


Iv been tracking the volatility of stocks and tata steel has a volatility of around 5%
And vince as i make this effort im also redaing a option basics book right now.
Important thing wat i feel is that i had something in my mind. and i shared that with u guys.
u are expert im a novice. But il make sure i leran it all out soon.
Cheers

Swagat,
Excel is v user friendly for such 'narration' ... can I suggest you work out your total profit OR loss in Excel and tell us the bottom line gain OR loss.

It will make it easier for us to cross check and point out errors (if any).

And mind u ... lots of us could learn from this excercise .. u and us are not the only ones

AGILENT

 

[vince]

example
STOCK NAME : TISCO
LAST TRADE PRICE 525.00
ON JULY 10 IT OPENS UP AT SAY 524
AT 1 O CLOCK I FIN THAT ITS TRADING AT 520

I PLACE I BUY ORDER @ 520
SELL ORDER(SL ORDER) @ 520
IN BOTH CASES THE QUANITY IS 675
BOTH GET EXICUTED

NOW I SELL TWO OPTIONS
1) OPT-TISCO-27-Jul-2006-520-CA Premium Value : 19,237.50
2) OPT-TISCO-27-Jul-2006-520-PA Premium Value : 16,875.00

AT 3.28 PM
I QUICKLY SQAURE OFF MY POSITIONS IN CASH MARKET
ONCE DONE WITH I EVEN SQUARE OFF THE OPTIONS

NOW LETS FIND THE p/L
TOTAL GAIN FROM THE PREMIUM FRONT 36112.5
BROKERAGE @ 0.05%
IN CASH MARKET 351000*0.05%=175.50
SINCE THERE ARE GOIN TO BE 4 TRANSACTIONS AND FOR SIMPLICITY I TAKE IT AS
17.5.50*4=702
NOW LETS SUPPOSE TWO SITUATIONS

STOC PRICE GOES DOWN TO 510
BEING A SELLER OF THE PUT
I WILL HAVE TO PAY 675*10=6750
THIS WILL BE MITIGATED WITH THE SELL ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE CALL OPTION WONT BE AFFECTED
I WILL INCUR A LOSS OF 2% THIS IS PAYABLE FROM THE CALL OPTION PREMIUM
WHICH IS RS 16,875.00 (WHICH IS 4.80% OF THE LOT VALUE, CAN ACT AS A S.L)

STOCK PRICE GOES UP TO 530
BEING A SELLER OF A CALL IM ELIGIBLE TO PAY 6750
THIS WILL BE MITIGATED WITH THE BUY ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE PUT OPTION WONT BE AFFECTED
I WILL INCUR A LOSS OF 2% THIS IS PAYABLE FROM THE PUT OPTION PREMIUM
WHICH IS RS 19,237.50 (WHICH IS 5.50% OF THE LOT VALUE, CAN ACT AS A S.L.)


Iv been tracking the volatility of stocks and tata steel has a volatility of around 5%
And vince as i make this effort im also redaing a option basics book right now.
Important thing wat i feel is that i had something in my mind. and i shared that with u guys.
u are expert im a novice. But il make sure i leran it all out soon.
Cheers

Swagat ,

Please , please do not be in a hurry. The mistake you have made in your calculations would be disastarous to your account if a real trade was taken.
You are assuming that your itm option will be exercised which rarely happens as pointed out earlier and have taken the difference in strike and spot prices as outflow where as it should be the premium at cmp when you square off of the options you should take into account.

I do not see how you assume that if the price moves up the put will not be affected or vice versa with the call. The premium of both will change almost equally whichever way the stock moves.

Pls think with a cool head, the clouds should clear.

 

[Agilent]

Swagat ,

Please , please do not be in a hurry. The mistake you have made in your calculations would be disastarous to your account if a real trade was taken.
You are assuming that your itm option will be exercised which rarely happens as pointed out earlier and have taken the difference in strike and spot prices as outflow where as it should be the premium at cmp when you square off of the options you should take into account.

I do not see how you assume that if the price moves up the put will not be affected or vice versa with the call. The premium of both will change almost equally whichever way the stock moves.

Pls think with a cool head, the clouds should clear.

Vince
See http://www.traderji.com/50264-post20.html

and your reply saying Swagat was right...

Now I am confused

AGILENT

 

[vince]

Vince
See http://www.traderji.com/50264-post20.html

and your reply saying Swagat was right...

Now I am confused

AGILENT

Only if the option is excercised does spot price come into play, else its a game of premium for square off.

No intention to confuse.

 

[Agilent]

Only if the option is excercised does spot price come into play, else its a game of premium for square off.

No intention to confuse.

Thanks Vince,

My understanding is that in India, all options are 'cash settled' on expiry or exercise. Correct ?

So if I have sold an ITM non-index options (American style now allowed) what is the settlement process in case of early excercise by the call buyer ?

Rgds
AGILENT

 

[vince]

Thanks Vince,

My understanding is that in India, all options are 'cash settled' on expiry or exercise. Correct ?

So if I have sold an ITM non-index options (American style now allowed) what is the settlement process in case of early excercise by the call buyer ?

Rgds
AGILENT

In case the option sold by you is ITM , the exchange randomly assigns the writers. You may or may not be assigned. If assigned you pay the difference between the strike price and spot closing for that day.

Since option buyers loose the entire premium payed in case of excercise , square off is a much preferred option. Excercise is resorted to only in case of illquid options.

 

[Agilent]

example

NOW I SELL TWO OPTIONS
1) OPT-TISCO-27-Jul-2006-520-CA Premium Value : 19,237.50

ONCE DONE WITH I EVEN SQUARE OFF THE OPTIONS

NOW LETS FIND THE p/L

STOCK PRICE GOES DOWN TO 510
BEING A SELLER OF THE PUT
I WILL HAVE TO PAY 675*10=6750
THIS WILL BE MITIGATED WITH THE SELL ORDER THAT I HAV PLACED IN THE CASH MARKET
AND THE CALL OPTION WONT BE AFFECTED

Swagat
(See Vince's clarifications in preceding posts .. implying that u need to square off each option EOD instead of hoping it to be assigned)

Since u will need to square off each option, 'best offer' rates at EOD will be applicable

See attachment to get an idea of the bid/offer spread

So the cheapest rate u can buy back the call is Rs 125 !! despite market having gone in yr favour. And u sold the call at 46 ?

But lets be fair ... lets assume that all calls are highly liquid and the Bid/offer spread is negligible (maybe 10 yrs from now we would have reached that mature state for market leaders like TISCO) , if u work out yr bottom line, I doubt if it will be positive.

Like I suggested earlier, try work out the exercise in Excel ... and check yr brokerage assumptions pl (also do not forget the margin requirements for sale of the options ... though this does not impact yr bottom line but only yr liquidity)

Cheers

AGILENT

PS Vince ... trust u will corroborate ... thanks

 

[swagat86]

im tryin to work out on this. because im a cash market trader i dont hav much idea, but im learnin. another imp thing is that Agilent the kind of difference in spread ur doc has seldom have i seen in liquid counters.no probs, still studin and il keep u updated.
bye