Sure Shot Futures & Options Calls

[Dev Mookerji]

Devji ,

Market seems to be weak , am expecting it might fall further from this level .

what is ur opinion.

For Market direction follow this.

http://www.traderji.com/equities/36064-market-nifty-outlook.html#post406402

 

[veluri1967]

Dev Da,
Why to pass time especially when I am here to engage you?
(Pl no offence is intended)

Can U please explain me in simple words - Strangle, Spread, Straddle.

U know I am struggling my best with Options learning.

 

[Dev Mookerji]

Can U please explain me in simple words - Strangle, Spread, Straddle.

U know I am struggling my best with Options learning.

Strangle :- A strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. The purchase of particular option derivatives is known as a long strangle, while the sale of the option derivatives is known as a short strangle. It is related to a similar option strategy known as a straddle.

Spread :-A spread trade refers to the act of buying one security or futures contract and selling another related one, in an attempt to profit from the widening or narrowing change in the price difference of the two.

As expiry of a long contract and delivery of the underlying physical commodity approaches, spread trades are used by Index Speculators in commodity futures markets to "roll" their positions out to a later delivery month. Thus, "extinguishing" their open interest in the expiry month while creating new open interest in the later delivery month. Because they always defer delivery, Index Speculators never take possession of physical inventories and do not operate in the commodity markets with concern for supply and demand- only price movement.

Straddle :- A straddle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. The purchase of particular option derivatives is known as a long straddle, while the sale of the option derivatives is known as a short straddle.

 

[rkkarnani]

Compiled quiet some time back, this is what I have on Straddle and Strangle. The examples were based on Satyams levels at that time!!! Hope it helps!!
Spread : The most common use is to define the difference between Best Buy and Best Sell Price!!!

What is a Straddle? 
A Straddle is a strategy where you buy a Call Option as well as a Put Option on the 
same underlying scrip (or index) for the same expiry date for the same strike price. 
For example, if you buy a 
Satyam July Call Strike Price 240 and also buy a Satyam July Put Strike Price 240,
you have bought a Straddle. As a buyer of both Call and Put, you will pay a Premium 
on both the transactions. 
If the Call costs Rs 12 and the Put Rs 9, your total cost will be Rs 21. 

When will I buy a Straddle? 

You will buy a Straddle if you believe that Satyam will become volatile. 
Its current price is say Rs 240, 
but you think it will either rise or fall significantly. For example, you could believe 
that Satyam could rise right upto Rs 300 or fall upto Rs 200 in the next fortnight or so. 

Why should it fluctuate so much? 

There could be various situations which might warrant heavy movement. 
For example, during Budget time, a favourable proposal might impact the price 
favourably and if nothing favourable is proposed, the price could fall significantly. 
An Indian company could be considering collaborations with a major foreign company. 
If the collaboration were to happen, the price could rise, and if it were not to happen, 
the price could fall. 
An Indian company might be expecting a huge order from a foreign company. 
The market might be awaiting news on this front. While a positive development 
might result in a price rise, a negative development might dampen the prices. 
Some companies might face huge lawsuits. The decision could significantly impact 
prices any which direction. 
In all these cases, you are sure that the price will either move up or move down, 
but you are not clear which way. 

How will the Straddle help me? 
Let us continue the above example. You have bought the Call and the Put and 
spent Rs 21. The current price and the strike price are the same Rs 240. 
Your profile will be determined as under:  

Satyam Closing Price 	Profit on Call 	Profit on Put 	Initial Cost 	Net Profit 
200 	0 	40 	21 	19 
210 	0 	30 	21 	9 
220 	0 	20 	21 	-1 
230 	0 	10 	21 	-11 
240 	0 	0 	21 	-21 
250 	10 	0 	21 	-11 
260 	20 	0 	21 	-1 
270 	30 	0 	21 	9 
280 	40 	0 	21 	19 
Thus you make maximum profit if the price falls significantly to Rs 200 or 
rises significantly to Rs 280. 
You will make a maximum loss of Rs 21 (your initial cost) 
if the price remains wherever it currently is. 

What are the other implications of Straddle? 

As a buyer of the Straddle, you will pay initially for both the Call and the Put. 
You need not place any margins as you are a buyer of both Options. 
If time passes and the scrip remains at or around the same price (in this case Rs 240), 
you will find that the Option Premia of both the Call and the Put will decline 
(Time Value of Options decline with passage of time). Hence, you will suffer losses. 

When will I sell a Straddle? 

You bought a Straddle because you thought the scrip will become volatile. Conversely, 
the seller of the Straddle would believe that the scrip will act neutral. The seller will 
believe that the price of Satyam will stay around Rs 240 in the next fortnight or so. 
Accordingly, he will sell both the Call and the Put. 
If the price indeed remains around Rs 240, he will make a maximum gain of Rs 21. 
If the price were to move up or down, he will make a lower gain as he will have to pay 
either on the Call (if it moves up) or on the Put (if it moves down). 

What is the break even point of the Straddle? 
The Straddle has two break even points viz. the Strike Price plus both Premia and the 
Strike Price minus both Premia. In the above example, the two break even points are 
Rs 261 (240 + 21) and Rs 219 (240 – 21). As seen earlier, the break even points are 
the same for the buyer and the seller.  

What are the other implications for the seller? 

As a seller, he will receive the Premia of Rs 21 on day one. He will have to place margins 
on both the Options and hence these requirements could be fairly high. If time passes 
and the scrip stays around Rs 240, the seller will be happy as the Option values will 
decline and he can buy back these Options at a lower level. On the other hand, 
if the scrip moves, he should be careful and think of closing out early. 

What is a Strangle? 

A Strangle is a slightly safer Strategy in the sense that you buy a Call and a Put 
but at different strike prices rather than one single strike price as in the case of a 
Straddle. For example, you could buy a Satyam Put Strike 220 and a 
Satyam Call Strike 260 at prices of Rs 5 and Rs 6 respectively. 
This would cost you Rs 11 and you would have a Volatile view on the scrip. 
The lower cost would however imply a wider break even and you would make profit 
only if the Scrip moves up or down by a wider margin. 

The profit potential is provided in this table:  
Satyam Closing Price 	Profit on Call 	Profit on Put 	Initial Cost 	Net Profit 
200 	0 	20 	11 	9 
210 	0 	10 	11 	-1 
220 	0 	0 	11 	-11 
230 	0 	0 	11 	-11 
240 	0 	0 	11 	-11 
250 	0 	0 	11 	-11 
260 	0 	0 	11 	-11 
270 	10 	0 	11 	-1 
280 	20 	0 	11 	9 

The two break even points here would be worked out as lower strike minus the 
two premia and higher strike plus the two premia respectively. In this case, 
the break even points are Rs 209 (220 – 11) and Rs 271 (260 + 11).

 

[AW10]

Veluri, my explanation on this

1) Long Straddle - Long one CALL + Long 1 PUT - of same strike price and expiry.
eg - Long 4900 Call + Long 4900 PUT

2) Long Strangle - Fat brother of straddle.. cause here their is distance between both strike price. Both strikes are OTM..
eg - Long 5000 Call + Long 4800 PUT Assuming market is 4900 level making both call and put OTM.

3) Spread - Involves one Long leg and 1 short leg. Create with EITHER Call or Put.
eg - Long 4900 CALL + Short 5000 CALL.
For more on spreads, refer to my thread on Low risk..

While first 2 are mkt mkt neutral strategy, Spread is directional. So in order to profit from Spread - you need the market to move in your direction.

You can create short version of all 3 of them by replacing LONG by SHORT in above examples.

Hope this helps in comparision.
Happy Trading

 

[trader.trends]

Veluri, my explanation on this

1) Long Straddle - Long one CALL + Long 1 PUT - of same strike price and expiry.
eg - Short 4900 Call + Short 4900 PUT

AW10

That should read as Long 4900Call + Long 4900Put for long straddle.

 

[Dev Mookerji]

Open positions as on date :-

Buy SAIL Future @ Market rate 213 . T- 229/244 . SL - 199 (By closing)

Hedge position by selling 210 call @ 8.5

 

[AW10]

AW10

That should read as Long 4900Call + Long 4900Put for long straddle.

Thanks TT for pointing it out.. Updated the post.
That reflects how difficult it is for short Straddle player to describe long straddle strategy. Infact, I had written the whole post from short straddle perspective first and then realise that I was on wrong track so changed it at most of the places but missed out at one place and you caught me there.

Thanks.
Happy Trading

 

[rkkarnani]

Open positions as on date :-

Open positions as on date :-

Originally Posted by Dev Mookerji
Buy SAIL Future @ Market rate 213 . T- 229/244 . SL - 199 (By closing)


Originally Posted by Dev Mookerji
Hedge position by selling 210 call @ 8.5

Dev, If we continue this position till expiry then our profit is limited to 5.50 (not taking into account brokerage etc.) even if SAIL achieves your targeted price!! Unless of course at some point of time you Square your 210 Call and market continues in our direction!!
SAIL closed at 212.80
SAIL 210 Call closed at 6.65

 

[Dev Mookerji]

SAIL closed at 212.80

Sail futures closed @ 213.40