Strategies, Any catch ?

#1
Hello Traderji and All members,

I am very new to options, though had traded futures many times.
My question is on option strategies and their risk. I came accross many strategies, but my question is for the trader who have practical experience in option trading. For example, we know if market is bullish one can make profit in going long in future. But in practical trading I have seen even if spot is rising, the future is static for a while - or basis(difference between spot and future) changes arbitarily, even from positive to negative , which can lead a trader to loss.

In the first image of attached file, sometime I found future and options are traded, in which if anyone take a long position on Put and a long position on future, can achieved a payoff diagram like first image of the attached diagram. In this case, is it really true that one can never make loss irrespective of where price goes? or ant catch can plan an important factor like volatility ?
Second image is of a short stradle, in NIFTY which gives a good range say almost 200 points between the break even points. We understand that one can be in profit if NIFTY is within that range. But, apart from range criteria, can there be something that can lead to loss even if NIFTY is within that range ? Volatility, early excercise, can any thing be faced ?

Thanks
 

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#2
What you say about basis is true. The futures could be static even as the index/ stock is moving up due to three main reasons: speculative shorting, hedging, effect of dividends.

A long put and a long future is equivalent to a long call. The profit profile that you have plotted is almost an impossibility. The seller of the put would be paying you to buy the put (wonder if people crazy enought to do that exist!). In that case, if the market went up, you would make money on the long futures and let the put expire. If the market dropped, you would lose money on the future, but that would be made up by the long put. Since you have been paid to buy the put, you make some money overall. Not possible!!

About the straddle yes, as long as the Nifty remains within the range, you make money. Even if volatility increases but the Nifty remains within the range, you make money. as long as you hold the position to expiry. Early exercise is not permitted for Index options, so this position is free from the perils of being assigned. However, you will have to consider this possibility for stock options.
 
#3
I am new to Options & have some questions. I am using an option calculator to calculate fair values for options but I am giving the current & expiry dates to calculate fair values which contains saturdays & sundays (non trading days) between them.
So, are the calculated fair values wrong?
How can one calculate correct fair values?
Where can one find the historic volatility values for Index and Stock options?
What is the significance of Implied Volatility?
What is Risk Free Interest Rate & what is its value now?
And finally, where can one find a good option calculator?

Please help me to find my answers.
Thankyou.

Subrata Bera.
 
#4
The fair values that you are calculating using the weekends are correct. Time decay does occur over non-trading days too, and you may want to factor it in if time value is an important part of your strategy.
Implied Volatility is the markets expectation of future volatility. Higher IVs lead to higher option prices, and lower IVs lead to lower option prices.
Risk free rate is the rate at which you can lend or borrow money on a risk free basis. Now, it should be around 7%. Anyway, this is the least important of the factors in the Black Scholes model.
Check out the online option calculators at
http://www.cboe.com/LearnCenter/OptionCalculator.aspx
http://www.hoadley.net/options/calculators.htm
 

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