Query on Put writing continued...

[Roshiniarya]

Hi
Firstly I would like to thank Leonoid for taking the time to clear my question on Put writing mentioned below.
However having said so I am wondering if what I am now suggesting can help me make some money.
I have 3 scenarios in mind
Scenario 1
At current levels I feel the nifty is in an uptrend and will stay so till the next settlement i.e May 16.
Hence I write Nifty PE of 7000 at 8.
I do this so that I can benefit all the premium that is there and since we are far away from expiry time decay has not set in.
Now as mentioned below if the nifty trades above 7000 in and on the day of May 16 settlement will I get to keep the entire premium amount.
Scenario 2
I want to take a balanced view of nifty and feel it is stuck in a range. Hence I write a call of May 16 CE strike price of 9000 for 2.70
Considering I have a PE strike price of 7000 for 8 what will be my profit and how much is the maximum loss possible.
Scenario 3
In addition to above mentioned scenario I also buy 7200 PE at 15 and 9200 CE at 1.95
Considering all the 3 scenarios when and where will I make a profit and what will be my maximum loss.
I am bit confused still and much appreciate your guidance.


Roshini


Re: Simple Query on Option writing
Quote:
Originally Posted by Roshiniarya View Post
Dear all
Please clarify my simple query regarding option writing.
Please consider the following eg:
I feel that the market is trending upwards and hence I do the below trade for April-16 expiry
Sell one Nifty PE 7750 at 50 with spot Nifty at approx 7850.

Please correct me if the below mentioned assumption is right:
In theory when I write a put option at 7750 I am not expecting the nifty to drop to below 7750.At the same time if the nifty trades above 7750 during expiry I get to keep the premium of 50 (X no of units).
Hence in theory my loss is unlimited but profits are limited to the premium amount.

However theory is much different from practical and hence my question is what happens to my investment in following scenarios
What happens to my trade if Nifty closes at 7700
What happens to my trade if Nifty closes at 7750
What happens to my trade if Nifty closes at 7800
In case of a wild swing say downwards to 7500 or upwards to 8200

Awaiting your kind consideration

Rosh
Upon expiration, there can be 2 possible scenarios for the Naked Put Write :

1. The underlying stock rises higher than the strike price
When the underlying stock is trading higher than the strike price of the put options that you sold upon expiration, those put options expires out of the money (OTM) and the entire price of the put options that you sold becomes your profit.

2. The underlying stock is trading lower than the strike price

Loss = Net Credit - (Strike Price - Stock Price) x Number of Contracts.

_________________________________

Maximum Loss of Naked Put Write:
Maximum loss = (Strike Price - Premium Value) x Number of Contracts.

Break Even Point of Naked Put Write:
Breakeven = Strike price - premium value of put options sold

So in your case if we take 1 lot.

Anything above 7750 you get to keep the premium = 50 * 75 = 3,750.

Anything less than 7750 [suppose 7500] will be = 3,750 - (7750 - 7500) * 75

= Loss of Rs. 15,000.

If it closes at 7750 then = 3750 - (7750-7750) * 75

therefore premium is yours.

 

[tradedatrend]

I have 3 scenarios in mind
Scenario 1
At current levels I feel the nifty is in an uptrend and will stay so till the next settlement i.e May 16.
Hence I write Nifty PE of 7000 at 8.
I do this so that I can benefit all the premium that is there and since we are far away from expiry time decay has not set in.
Now as mentioned below if the nifty trades above 7000 in and on the day of May 16 settlement will I get to keep the entire premium amount.

Yes you will get the premium of Rs. 8. Total profit would be 75*8= rs. 600.
For this you would have to place a capital of Approx Rs. 40 K

But after employing approx 40K for 1.5 month would you be happy with Rs. 600 out of which you will have to reduce brokerage and taxes too.

I have 3 scenarios in mind
Scenario 2
I want to take a balanced view of nifty and feel it is stuck in a range. Hence I write a call of May 16 CE strike price of 9000 for 2.70
Considering I have a PE strike price of 7000 for 8 what will be my profit and how much is the maximum loss possible.

Yes you will get the premium of Rs. 8 + 2.70, Total profit would be 75*10.70 = rs. 802.50

For this you would have to place a capital of Approx Rs. 80 K

But after employing approx 80K for 1.5 month would you be happy with Rs. 800 out of which you will have to reduce brokerage and taxes too.

I have 3 scenarios in mind
Scenario 3
In addition to above mentioned scenario I also buy 7200 PE at 15 and 9200 CE at 1.95
Considering all the 3 scenarios when and where will I make a profit and what will be my maximum loss.
I am bit confused still and much appreciate your guidance.


Roshini

here in your scenario 3 there could be three outcome. (Total capital employed Approx 80K)


A. if market remain between 7200 to 9000 ---> then you will lose a premium of (15+1.95) - (8+2.70) = Rs. 6.25 * 75 = Loss of Rs. 468.75 Plus h brokerage and taxes

B. If market goes below 7000 ---> then you will earn a profit of = (7200-7000) - ((15+1.95) - (8+2.70))) = Rs. 193.75 * 75 = 14531.25 out of which brokerage and taxes would have be reduced.

C. If market goes above 9200 ---> then you will make a net loss of = (9200-9000) + ((15+1.95) - (8+2.70))) = Loss of Rs. 206.25 * 75 = 15468.75 Plus brokerage and taxes

 

[gemat]

it is time consuming, margin is blocked for two months with very low return assuming nifty will stay in the 7000-9000 range. deducting brokerage and tax, you will lose another 4-5 points. is it really worth the time and effort you put into it?

 

[Roshiniarya]

Thank you very much sir.Your response is an eye opener.
However having said so may I request you to clarify a few more points.

As mentioned in Scenario 1 instead of waiting till expiry to pocket the premium is it possible to get the premium prematurely.
In other words please consider that if as of today I have sold Nifty PE SP 7000 for 8 and the nifty is going higher say close to 8000.Then the Nifty PE of 7000 is going lower can I square off my position in profit.
Or whenever I write a call or put either naked or covered I have wait till expiry to close my position.
As in buying a call or put option one has the opportunity to either sell in profit or loss.. how can somebody do so when one has written a call or put.

Please explain ...

Thanks :clapping:

Roshini

 

[tradingstudent]

Yes. Just like after buying either call or put option, you can close them either in profit or loss before expiry you can do the same with the options that were written: either a call or put.

You just have to buy the call or Put option and you will be in either in profit or loss depending upon the buying price.

Example:
Expiry Date: 30th April
When Nifty was at 8000 you have Written 7000 PE @8 on 1st April

After this Nifty went up and down by 100 points in a range and ended at the same 8000.

Bought 7000 PE @ 2 on 5th April

Writing/Selling Premium=8
Buying Premium=2

So profit of 6 Points.


A simple point to explain this:

You always have a Buy and Sell Transaction whether you end up in profit or loss. The order of buy and sell determines whether you are buying options or writing options.

I mean writing options is just the reverse of buying options from transaction point of view.

[Note: Risk Management/Margin/Option Behavior etc... will vary between options buying and writing]


Buying Option:

1st You Buy @X
2nd You Sell @Y

Y-X is the profit or loss.

Writing Option:

1st You Sell @Y
2nd You Buy Back @ X

Y-X is the profit or loss.

 

[tradingstudent]

If you were to ask me for advice, i would say the following and do take it in the right way:

Please spend more time in understanding the intricacies of options. When Writing options it is essential that one must have a good trading and risk management plan.

Especially writing them naked: In general people wouldn't advice this even for a experienced trader let alone some one just venturing into options.

Prima Facie, OTM options look like easy picking for naked writing , but they can go wrong horribly. We might get away with 99/100 times but it is the one time that we need to guard ourselves...

Recent case, when Chinese markets were down, Indian markets opened to a great fall. You should check the OTM values, they were in multiples of 1X-10X+ if i remember correctly...

Please do your homework and options can be a wonderful friend if used properly...

All the best...

 

[tradedatrend]

I request you to clarify a few more points.

As mentioned in Scenario 1 instead of waiting till expiry to pocket the premium is it possible to get the premium prematurely.
Roshini

Yes it is possible to square off your position at any date between start of the trade and expiry. But be informed when you square off your trade in middle of the month, in that you case you will have to buy it back at the prevailing prices.

Or whenever I write a call or put either naked or covered I have wait till expiry to close my position.

You can close your positions at any time you wish (provided market is open).

As in buying a call or put option one has the opportunity to either sell in profit or loss.. how can somebody do so when one has written a call or put.

You can square off your position always before expiry, no terms and conditions.

If you have shorted something simply buy that.

If you have bought something simply sell that.

When somebody has written a call or put, he simply need to buy that call or put at prevailing prices.

 

[gemat]

http://zerodha.com/varsity/module/option-theory/ this is a free options course by Zerodha. easy to follow n you will learn everything you need to know about options. doesn't include option strategies.

 

[Buzzstop]

Try NSE Paathshaala. Here you can do simulated trading in real time to learn hands on.

http://www.nseindia.com/NP/nse_paathshaala.htm

 

[crazymouse]

Unlike in stocks where you can buy a stock and sell covered calls, Can you buy NIFTY and sell covered NIFTY call ? If so will this NIFTY have expiry after we buy or we can continue to hold NIFTY for long term like 2-3 yrs also ?