Some use-cases with Options.

JForex78

New Member
Hi,

I am new to this forum. And to Options trading.

I have read a lot before posting here. And based on that, have come up with some use cases I can execute.

But I am looking for confirmation of my understanding.

Can you help me with these below?

Thank you.

PS - I use only Buy side for discussion, I understand it applies to Sell also.

1. Is it correct that out-of-the-money Options are always cheaper?
I always see them under \$2 - like \$1.5 to cents.

Because anyone can buy at the market for lower price.
Can this be taken as a general statement?

2. Is it correct that after the option becomes in-the-money, its price goes up by almost same price as stock?

For a stock is trading at \$50, I buy a Call@\$50 for \$1.
If the stock goes up by +\$10 to \$60 - the Call price will also go up by almost +\$10 to \$11?

Minus some difference.

3. If 1 & 2 are true, I made a Use Case of how I can use a Call to Leverage my Buy.

Assume a Stock is trading at \$50. I buy a Call Option at \$55.

Because it is \$5 out of the money - I can hope to buy the Call@55 for \$1.

If stock does not go up, or only goes up to \$55, I just let it expire at its new lower value. And lose a max of \$100.

If stock does goes up by +\$15 to \$65, the option will also go up by +\$15, making it \$1+\$15 = \$16.

So I have \$10 gain on \$1. That's 1,000% Gain?

Is this correct?
In what cases can this go wrong?

4. If I hedge a Dividend stock with a Put option, I can keep all Dividend(-premium) with no to minimal risk?

I am going to make up some numbers to make the point.

Stock trading at \$250 pays a dividend of \$5 in the coming week.

First, I buy Put@250 at \$2
Then, I buy the stock at \$250.

Stock pays \$5 dividend.

I sell the stock at \$250 at \$0 loss.

Basically, the dividend is only reduced by the premium.

Is this correct in theory?
Where and how can it go wrong?

5. If 4 is correct, it will work with high price stocks only.
Because at a given yield, we need the dividend/ share as much higher than the premium as possible - to keep most dividend.

\$1 Dividend - \$1 Premium = \$0
But
\$5 Dividend - \$1 Premium - \$4.

Thats keeping 80% of the dividend.

Thank you.

Well-Known Member

@JForex78 welcome to this Indian Trading Forum. Options in India are played in EU style, so the US style of factoring Dividend and other stuffs does not apply for us. Hence, calculating POP or Greeks are different for us.

One more thing, no matter what you do, everything boils down to one simple (not easy) thing - the system must provide a (directional and/or non-directional) edge before volatility hits when you buy options as everything else is against you including time, otherwise you are just over-leveraging i.e. going to a gun-fight with a needle after throwing away the knife.

Please evaluate all the involved risks before taking the plunge. Getting rich quick formula never works. In every game there is always an opponent and always a victim. The trick is to know when you’re the latter so you can become the former.

phani_genin

New Member
@JForex78
in short, you have vague ideas in ur mind - but in reality, prices follow Models & the supply-demand.

1) Yes OTM options are cheaper, cos the probability for them to expire worthless is greater.
2) Not necessarily - and here is where all your other ideas dont work.

Talk in terms of greeks => delta becomes 1 only if the option is deep in the money..
From 50\$ stock, if it moves to 60\$ only then, delta becomes 1, i.e when stock reaches 60, your 50\$CALL wont be behave delta=1 (possibly)
if you take specific examples, this concept will be clear
3) Wrong, doesnt work cos of reason explained above. Take a real life, say Reliance Option Chain and do ur calcs
4) On paper, yes there are option strategies to pocket Dividend, but then, if you see real life examples, once dividend is declared - the option premium reflects the move already..
so you have to do this exercise, BEFORE div is declared.
5) explained

I had tried to simulate optionchain of NIFTY options, but they dont follow BlackScholes looks like.
Has anyone had success able to simulate NIFTY option prices.