sell option

[ivanboesky]

tdeel,
The options market is still in its nascent stage in India. Not too many people understand the intricacies of the market. Very few people would even know that a short put is nothing but a covered call. The profit profile for both strategies is the same. The only difference would be in the margins paid upfront...
Between a short put and a short call, most people would be fearful of a short put, when in theory a short call is more risky as the underlying could go to infinity, while at worst the underlying could only fall till zero.
Anyway, we need people like that in the market. Otherwise, where would we make the money from?

 

[tdeel]

Ivanboesky,

I love this forum. Market and international education all in one.
Makes things so much more interesting.
As you probably know, most of the elite traders over here think of the covered call writers as being a bit foolish when, as you said, short puts exhibit the same profile. I have no real opinion either way. I think of covered calls as being a bit more conservative, but only because that's what I learned first.

Good talking,
good trading,

tdeel

 

[ivanboesky]

Covered calls can be looked at as more conservative if you have bought a stock that you think is fundamentally strong and you want to hold onto it for a long time. You then sell far out of the money calls to generate some extra income, thats all.

 

[jntrade]

Hi evan,me again!
All people talks about corrections!Market always goes up!
If I buy say 2 lak worth shares of one stock ,since market lot is of higher value (say 5 lak)is there any mechanism in options to hedge my stock,if a sudden correction comes..?
Thanks

 

[ivanboesky]

If you want a one time hedge, you can buy a put option with a strike close to your stock buy price. In case the market goes up, you will make less money than if you had not hedged.
In case the market falls, your loss is limited to the premium you have paid.
If you have time to monitor your investment, you can go in for a dynamic hedging strategy.

 

[aca_trader]

tdeel,

Between a short put and a short call, most people would be fearful of a short put, when in theory a short call is more risky as the underlying could go to infinity, while at worst the underlying could only fall till zero.
Anyway, we need people like that in the market. Otherwise, where would we make the money from?

Ivan,

Though the theory is perfect but it's based on assumptions which don't work in the market, viz., :
1. The theory does not take into account transaction costs.
2. No underlying moves to Infinity or Zero in a given period. There are always chances of Upward MOve and Downward MOve to certain extent and we all are aware that market falls fastly than it goes up.

Regards,
--Ashish

 

[ivanboesky]

True, there are transaction costs, but isnt that one of the costs of hedging (static or dynamic). And isnt it better to take a small hit in terms of transaction costs, rather than bleed if the market moves against you.
As for sudden market movement, dynamic hedging should only by undertaken by people who have time to constantly watch the market, as I had said earlier too.

 

[jntrade]

Thanks Ivan.
Can you give some more explanation to dynamic hedging?

 

[subratabera]

Hi Ivan,

I am also interested in different hedging strategies. Please explain a little more about some good hedging strategies including dynamic hedging...

Thankyou

Subrata Bera