please guide me in options

[sjerry4u]

I just now learned about options. and concluded the following things. please correct me if conclusion is wrong.
Let
strike price - P_strike
premium - Prem
SPOT price @ expiry - P_exp.
then

1) Buy call option liquidated in two ways
A) square off by selling call option
profit/loss= Prem_sell-Prem_buy
B) exercising option
profit=(P_exp-P_strike-Prem_buy)
so
Max. Loss can be premium paid
no limit on profit.
used when rise expected

2) Sell call option
A) square off by buying call option ?? (is it possible to sell call option first and square off by buying afterwards ???)
Profit/loss= (prem_sell-prem_buy)
B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_exp-P_strike-prem_buy
so
loss can be unlimited
profit limited to prem
used when fall expected


3) buy put option
A) square off by selling put option
profit/loss= Prem_sell-Prem_buy
B) exercising option
profit=(P_strike-P_exp-Prem_buy)
so
Max. Loss can be premium paid
no limit on profit.
used when fall expected


4) sell put option
A) square off by buying put option ?? (is it possible to sell put option first and square off by buying afterwards ???)
Profit/loss= (prem_sell-prem_buy)
B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_strike-P_exp-prem_buy
so
loss can be unlimited
profit limited to prem
used when rise expected

 

[awachat]

You must visit Ghosh form which you will find in options category.

 

[AW10]

sjerry4u, you seems to be on right track and have got these basics right.

Just few amendments from my side will be

2) Sell call option
A) square off by buying call option ?? (is it possible to sell call option first and square off by buying afterwards ???)

Yes, you can sell call option first and then buy it back later. Also referred as writing calls / shorting call option.

B) exercising option
profit= prem if (p_exp<p_strike)
Loss = P_exp-P_strike-prem_buy

As option seller, you have no control on excercising. You can only be assigned. So I would rather call B) as Assignment of option.
This assignment can happen on expiry day when exchange settles all ITM contract or for american style options on our stock options, it can happen
on any day before the expiry depending on assignment by exchange.

Good going. You practice them with real numbers as example.
Try practice to draw risk graphs for these 4 cases. Try knowing breakeven point in each situation.
If you get the mastery on these basics and can visualise the risk graphs, then a very important foundation of your options trading is in place.

Happy Learning

 

[AW10]

To buy option, timing is very important. One more point i would like to highlight is that u should buy out of the money call, because when u buy in the money call u r unncessarily paying intrinsic value. In case the price of the scrip falls u tend to loose the premium u have paid.

Ketan, when buying ITM option, you are paying for something which has substance and tangible intrinsic value. whereas OTM option has no real value.
So it is your choice, whether u want to pay for the air (OTM option) or want to pay for the solid (ITM option).

My personal preference is to pay for something that has value ie ITM options.

There is time when trading in OTM options helps (when trend is strong), else All those options that expire worthless are OTM options.

Hppay Trading

 

[ppmatkari]

Ketan, when buying ITM option, you are paying for something which has substance and tangible intrinsic value. whereas OTM option has no real value.

There is time when trading in OTM options helps (when trend is strong), else All those options that expire worthless at OTM options.

Hppay Trading

My 2 cents...
ITM options are much safer than OTM ones & the difference in return you gain by purchasing ITM rather than OTM is only slightly less. So unless you are very sure about the trend (dont think most ppl are at present) & have much greater risk appetite, its wiser to buy ITM's rather than OTMs.

 

[sjerry4u]

thank you everyone .......
as my reading will go on,
new doubts will keep comin.