Options - My way of looking at it

[manishchan]

check the current option chain also ...it is only 25.....it is 6700 call 150pts OTM and not 6600 CE

these were prices as of close yday taken for illustration purposes

Ok.. thanks. Your post said 66700PE so got confused

Edit : I'm sure that was just a typo. Thanks for clarifying.. please continue.. It's very very interesting and something I was desperately looking for from an experienced person.

 

[VJAY]

Dear Pratap,
Thanks for starting a great thread for options....as options are still dumb for many including me ...as I know you are great teacher as like as a great trader,your way of explains is soooooooooo simple so am sure we all get into options soon...

 

[pratapvb]

Ok.. thanks. Your post said 66700PE so got confused

Edit : I'm sure that was just a typo. Thanks for clarifying.. please continue.. It's very very interesting and something I was desperately looking for from an experienced person.

thanks...actually edited the previous post and orginal post after I wrote last post

 

[Gaur_Krishna]

Great Thread Pratapji.... Another gem after VWAP......:thumb:
I am liking your simple maths for option greeks

Regards,
Gaur_Krishna

 

[Gaur_Krishna]

When the move starts the delta is 0.8 and as we gain more points the option moves further ITM and thus increasing its delta to 0.85 , 0.89 like that.....
So it would be definitely more than 70 points ......

my 2 cents ....Thanks Pratap sir

Regards,
Gaur_Krishna

When the move is in favour, then where futures would gain 100 points against 100 points move of the underlying, the option would gain only 70.

If one were trading a system with positive expectancy, the this is a major disadvantage.

delta is 0.8+ so we would be gaining more than 80pts....and I am willing to forego that 10-20 pts...for the protection it gives me for move against, so that I can be positional and get good sleep and don't have to wake up in the middle of the night to see what dow jones is doing...and then not sleep rest of the night if dow jones is 3% against our postiion.....finally it is left to individuals

 

[TradeOptions]

Thank you Pratapji for starting such a great thread. It is extremely informative for options learners.

Thanks a lot

 

[pratapvb]

now let us say that we have a moderate view of the upside (max 6600-6650) and not much downside from current NF position i.e. 6500

so we
Buy a 6500 Call @83

but the above is a big loss for small upside if the market goes down and expires below

so we also

Sell a 6600 Call @36

now we have an initial debit of only 83-36 = 47 (maximum loss)

but what about upside......
max profit will be 100-47 (initial debit) = 53

This is what is called a bull spread...a moderate bullish expectation so subsidizing the cost of the intial postion by selling a higher call.

Of course similarly we can make a Bear spread with Puts

The payoff chart of the bull spread would be

 

[pratapvb]

but suppose in the above case our view is more strong that there maybe some upside but the upside is capped around 6600 for this expiry say

then we could sell 2 calls of 6600

Buy 1 6500 Call @83 and
Sell 2 6600 Call @36

so our intial debit would be 83-36-36 = 11

so we get into the position with only an initial risk of 11

but now we have increased risk on the upside if it goes beyond 6600-11 - 6589 as then from there loss will keep in and loss can be unlimited to the extent of the upmove

This is what is called ratio spread as we have take a buy:sell position in the ratio 1:2

but we are conservative people and not gamblers so we need to buy some insurance to cap the upside

and so we buy 1 6700 Call @12 (max loss will then be 100 + intial debit) or a 6800 call @ 4 rs but then max loss could be 200+ initial debit if mkt closes near 6800

so what insurance we buy can be decided accordingly

 

[pratapvb]

ratio spreads are probably best taken at the beginning of expiry as the buy sell prices have higher values giving us some better spreads....but risk is more as real payoff comes only at expiry and we have to hold it throughout the period and block the capital for it (sell option requires margin) and also more things can go wrong the more time is given to it....and in ratio spread note that the ATM delta is 0.5 and having sold 2 OTM options with probably an avg delta of 0.25-0.3.....the net delta is almost zero....so not much can be got by exiting the position pre-expiry...other than cutting your postion if mkt starts to suddenly move and your moderate + capped view as changed

 

[pratapvb]

there are 51 people who have thanked the 1st post.....and then down to 8-10 by the middle of the 2nd page and now down to about 5......

looks like I have scared away most of the people with my ramblings, sticking to elementary math notwithstanding