Nifty options basic knowledge

[sumeetsj]

If I sell a call option CE5000 and sell a put option PE 5000 will the risk be nill ( except brokerage) Can somebody explain ?

Selling a call and a put of same strike is called as "Short Straddle".

Say u sell 5000 CE and 5000 PE at a premium of Rs. 100/- each.
Total premium collected will be Rs. 200/-,
so your risk will begin below 5000-200 = 4800, and similarly,
on the upside above 5000 + 200 = 5200.

These are called LBEP = Lower breakeven point and
UBEP = Upper breakeven point.

 

[sumeetsj]

in the above case if Nifty expires at exact 5000 you will earn maximum.

Also if Nifty is rangebound between 4800 and 5200 you need not worry.

 

[NANDAMAD]

Hi quantumguy,

Indian index options are european nature. It is not possible you to execise before the expiry date. It can be execise on the expiry day. Where as stock options can be execise at any point (American nature). Before expiry, you can sell/buy options to collect only the premium differences.

This will help you to understand the options.

Meena.

Thank you so much, I did not know that index cannot be squared off any time
Thanks again

 

[trader.trends]

Hi quantumguy,

Indian index options are european nature. It is not possible you to execise before the expiry date. It can be execise on the expiry day. Where as stock options can be execise at any point (American nature). Before expiry, you can sell/buy options to collect only the premium differences.

This will help you to understand the options.

Meena.

Thank you so much, I did not know that index cannot be squared off any time
Thanks again

All options on NSE are European only. Earlier this year the stock options also have been converted to European only in an effort to boost liquidity in the stock options market.

Nandamad: Index options can be squared off any time you want. There is ample liquidity in them. The term Exercise the Option is causing the confusion. Earlier the Stock Options were of the American Style where if there were no buyers for the options that you had purchased and wanted to sell, you could exercise it. This essentially meant the exchange in a random process would "Assign" your options to one of the person who had sold options earlier. This has been eliminated since the stock options have also been made European.

 

[taruj]

If I sell a call option CE5000 and sell a put option PE 5000 will the risk be nill ( except brokerage) Can somebody explain ?

Naw Man!

There is always some risk.

Say you sold both put and a call for 5000. [A beautiful SHORT STRADDLE)

Sell 1 X NIFTY 5000 PE @ 180 (assumed values)
Sell 1 X NIFTY 5000 CE @ 150 (assumed values)

Total (180+150) = 330

On the upper side you are betting that NIFTY would not cross above 5330 (selected strike)+330 (premium you recieved). Who knows what is gonna happen on the expiry, Will Nifty Really Close above 5334?

On the lower side you are also betting NIFTY would not crash below 4670(selected strike)-330, premium you recieved). Who knows what is gonna happen on the expiry, Will Nifty Really Crash below 4670?

In my opinion NO. So on the expiry you get to keep your 16500(minus brokerage).

HOWEVER, there is always some risk.



Rgds,
Taruj

 

[AW10]

Naw Man!

There is always some risk.

Say you sold both put and a call for 5000. [A beautiful SHORT STRADDLE)

Sell 1 X NIFTY 5000 PE @ 180 (assumed values)
Sell 1 X NIFTY 5000 CE @ 150 (assumed values)

Total (180+150) = 330

On the upper side you are betting that NIFTY would not cross above 5330 (selected strike)+330 (premium you recieved). Who knows what is gonna happen on the expiry, Will Nifty Really Close above 5334?

On the lower side you are also betting NIFTY would not crash below 4670(selected strike)-330, premium you recieved). Who knows what is gonna happen on the expiry, Will Nifty Really Crash below 4670?

In my opinion NO. So on the expiry you get to keep your 16500(minus brokerage).

HOWEVER, there is always some risk.



Rgds,
Taruj

Taruj has explained the calculation of breakeven points. But I have comment on highlighted text..

- Most likely, one of the leg will expire ITM (if series doesn't settle precisely at 5000). Depending on where it settles, you will have to give back some money in final settlement. Say it expires at 4900. So you have to give back 100 on short put leg. So your net profit will be 330*50 - 100*50 = 11500.
ofcourse adjust for brokerage and final settlement charges for ITM leg.

If series expires beyond the breakeven point then you will have additional losses.

Hope this helps
happy trading.

 

[taruj]

Taruj has explained the calculation of breakeven points. But I have comment on highlighted text..

- Most likely, one of the leg will expire ITM (if series doesn't settle precisely at 5000). Depending on where it settles, you will have to give back some money in final settlement. Say it expires at 4900. So you have to give back 100 on short put leg. So your net profit will be 330*50 - 100*50 = 11500.
ofcourse adjust for brokerage and final settlement charges for ITM leg.

If series expires beyond the breakeven point then you will have additional losses.

Hope this helps
happy trading.

Yups! AW10, you r right!

 

[taruj]

Yups! AW10, you r right!

Hey AS10,

Why do you say that in case the Nifty Closes at 4900 you would have to give back Rs 100*50? Even if Nifty is at 4900 no one would exercise the PUT or the CALL. Request you to please explain.