Options Basics & Advanced by NSE

#1
First of all would like to thank all of you who have contributed to my learning of Option Basics and hope that in future also new learners like me get a helping hand in understanding the intracacies of the stock market and derivatives.

My learning of Options Basics has prompted me study more and am still studing the various Option Strategies. While on the search for learning material of Option Trading, i came across NSE Website where Option Method is explained clearly in terms of examples and various Option Strategies. I am attaching the same for new learners who wants to understand Options Basics.

As you know, the more you learn, there is at some point, some terms confusing to a new learner even if it is explained in simple terms, hence would request Seniors to please explain to me the following:

1)
In Call, normally there is a Buy Call and a Sell Call. In this if I buy a Call(when i think the market is going to go up) then profit is unlimited and loss is only the premium. Whereas in Call if I sell a Call, then the profit is limited while loss is unlimited.

Please advise whether my calculation is correct or wrong.

2)
In Put, normally there is a Buy Put and a Sell Put. In this if I buy a Put(when I think the market is going to go down) then profit is unlimited and loss is only the premium. Whereas in Put if I sell a Put, then the profit is limited while loss is unlimited.

Also, would request if the above calculation is correct or wrong.

Thanks,
 
#2
The contentions raised in your question are theoretically correct. But practically, there is very little profit in options because the initial premium takes count of raise in share price. Therefore, only when there is extraordinary raise or fall, the profit is made. When we purchase a call and share price falls, the fall in premium is very steep while the increase in premium with increase in price of the share is moderate. Therefore, the money is only made by the option writers more than buyers. Further, with passage of time, the time premium is reduced and thus, in the stagnant market, option buyers loose heavily.
Murthy R.N.
 
#3
The contentions raised in your question are theoretically correct. But practically, there is very little profit in options because the initial premium takes count of raise in share price. Therefore, only when there is extraordinary raise or fall, the profit is made. When we purchase a call and share price falls, the fall in premium is very steep while the increase in premium with increase in price of the share is moderate. Therefore, the money is only made by the option writers more than buyers. Further, with passage of time, the time premium is reduced and thus, in the stagnant market, option buyers loose heavily.
Murthy R.N.
Options are sold by professional traders with proper risk and money management whereas options are bought by novice traders without proper risk and money management. Though Theoritcally it seems for the buyer of Call/Put, the loss is limited and proift is unlimited, rarely any buyer gets unlimited profit. If market moves 500 or 1000 points up or down then only buyer of calls gets unlimited profit. Consistently it is not easy to make money by buying calls/puts. You can make money by selling options consistently year after year if the risk and money management is proper.
Out of 12 months 2/3 months will be bad for option sellers, there you have to trim your position and mange your money properly. Markets trend 1/4 of the time and market is sideways for 3/4 of the time
 
#5
The contentions raised in your question are theoretically correct. But practically, there is very little profit in options because the initial premium takes count of raise in share price. Therefore, only when there is extraordinary raise or fall, the profit is made. When we purchase a call and share price falls, the fall in premium is very steep while the increase in premium with increase in price of the share is moderate. Therefore, the money is only made by the option writers more than buyers. Further, with passage of time, the time premium is reduced and thus, in the stagnant market, option buyers loose heavily.
Murthy R.N.
Thanks for your reply. From your answer I understand that what I have mentioned is correct for both the queries. Yes, understand that premium takes count of raise in share prices. Initially i plan to buy Call Nifty 50 or buy Put Nifty Fifty.

Another query, in case I buy Put NIFTY 50 at a strike price of Rs.5500 at a premium of 16.50. Expiry is 30th September, 2010. The spot price is Rs.5717.85. I assume my breakeven will be Rs.5500 - 16.50 = Rs.5483.50. So for me to breakeven, the spot should be 5483.50.

If on 20th September, 2010, the Spot is Rs.5300, then the profit I would be making is Rs.5483.50 - Rs.5300 = 183.50 x 50 = Rs.9,175 Profit,

Seniors, Option traders, please advise whether I am correct in my calculation.
 
Last edited:

rkkarnani

Well-Known Member
#6
You seem to be puttingyour query ay multiple places... I remember answering "same" query elsewhere on the Forum. Please avoid this.

About your query : Your calculation is correct... (Brokerage and other charges not accounted for)
 
#7
You seem to be puttingyour query ay multiple places... I remember answering "same" query elsewhere on the Forum. Please avoid this.

About your query : Your calculation is correct... (Brokerage and other charges not accounted for)

rkkarnani, thanks for taking the patience to reply. yes, noted.
 
#8
One more query,

If I purchase the NIFTY 50 PUT of November, 2010, can I sell it any time, i mean, if i make profit in September, 2010 itself, can i sell it in September, 2010.

Thanks for your understanding.
 
#10
Seniors,

Thanks for the guidance. Traderji has been a very good source of information to me to clarify and clear my doubts.

Today, I have put my first order in Option for October Series at 5800 at a premium of Rs.95.00.
 

Similar threads

Broker Special Offers

Intraday Higher Leverage

Save up to 90% in brokerage and get higher leverage for intraday trades.

Name:Phone:
Email:City:
State:
Are you a day trader?