Trading options with one month view
- Thread starter Reki
- Start date
I smell sarcasm in the air!
At the basic level, the price of anything that is tradable (having a buyer & a seller) in the open market is solely dependent on supply and demand.
Example 1:
A 2 year old Maruti Swift diesel might sell for Rs. 5 Lacs, but a 2 year old Tata Indica Vista diesel might sell for Rs. 3 Lacs, eventhough both had the same on-road price when they were new.
Now you can explain this phenomenon the traditional way - that is, Marutis are more reliable, better service, better build quality etc etc - and hence has a better resale value.
Or you could explain in simple economics - there simply is more demand for Maruti Swift in the used car markets. If the demand for Tata Vista is more than it is right now, would it trade at Rs. 3 Lacs? Absolutely not. Because the seller will quote more.
Example 2:
Infosys option prices are unusually high during the quarterly results. You can go on and on about implied volatility being high or you can look at the past data and say that the price moves up/down significant after the results are announced.
OR
It can be explained with basic supply/demand concept. There is simply too much demand for stangles/straddles from option buyers during results. When there is too much demand from option buyers, basic economics demands that prices have to go UP. Option sellers will step in only at a particular price.
Example 3:
During the last week of expiry, all options that are out of money start losing value rapidly. You can explain that the traditional way - time decay/delta etc etc.
OR
You can explain in the supply/demand way. When the option buyers know that a particular option strike price has lower and lower probability of earning money, demand for such options will be low. The only way the option sellers can SELL is by quoting lower prices.
For somebody who is new to options, this is perhaps the easiest concept to understand how prices work.
At the basic level, the price of anything that is tradable (having a buyer & a seller) in the open market is solely dependent on supply and demand.
Example 1:
A 2 year old Maruti Swift diesel might sell for Rs. 5 Lacs, but a 2 year old Tata Indica Vista diesel might sell for Rs. 3 Lacs, eventhough both had the same on-road price when they were new.
Now you can explain this phenomenon the traditional way - that is, Marutis are more reliable, better service, better build quality etc etc - and hence has a better resale value.
Or you could explain in simple economics - there simply is more demand for Maruti Swift in the used car markets. If the demand for Tata Vista is more than it is right now, would it trade at Rs. 3 Lacs? Absolutely not. Because the seller will quote more.
Example 2:
Infosys option prices are unusually high during the quarterly results. You can go on and on about implied volatility being high or you can look at the past data and say that the price moves up/down significant after the results are announced.
OR
It can be explained with basic supply/demand concept. There is simply too much demand for stangles/straddles from option buyers during results. When there is too much demand from option buyers, basic economics demands that prices have to go UP. Option sellers will step in only at a particular price.
Example 3:
During the last week of expiry, all options that are out of money start losing value rapidly. You can explain that the traditional way - time decay/delta etc etc.
OR
You can explain in the supply/demand way. When the option buyers know that a particular option strike price has lower and lower probability of earning money, demand for such options will be low. The only way the option sellers can SELL is by quoting lower prices.
For somebody who is new to options, this is perhaps the easiest concept to understand how prices work.
@Smartcat
Do not worry about sarcasm. The above explanation is very well done, specially as you now use the word: OR. :thumb: Now you explained it in both ways, as both ways are finally correct and not only one. When I see something explained only from the view of one side, even there exist other kind of correct views, and it is shown as THE view, then I get sarcastic. But you clearly showed that you know both sides and that shows your understanding of how to explain how those chewing gum derivative works and is to understand. Well done.
Take care and enjoy your weekend / DanPickUp
Do not worry about sarcasm. The above explanation is very well done, specially as you now use the word: OR. :thumb: Now you explained it in both ways, as both ways are finally correct and not only one. When I see something explained only from the view of one side, even there exist other kind of correct views, and it is shown as THE view, then I get sarcastic. But you clearly showed that you know both sides and that shows your understanding of how to explain how those chewing gum derivative works and is to understand. Well done.
Take care and enjoy your weekend / DanPickUp
Hi all, the index was flat till thursday as what was expected and only on friday did it move and strongly it went up. I have now view of nifty index at the current level + /- 50 points here or there, so I continue to hold my current credit spread of Sell Call 6100 and Buy Call 6200 for one more week. I would stand to gain if the market is in the range of + 50 points and - any level till the end of next week.
Reki
Reki
Last edited:
Hi,
My call credit spread which I took two weeks ago is as follows:
Call 6100 (2 lots) sold at 131, present price = 78 ( Gain = 53 rupeees)
Call 6200 (2 lots) bought at 81, present price = 29 ( Loss = 52 rupees)
So net gain as on yesterday weekend closing is 1 rupee. This position I took two weeks ago.
I am quite amused to see such a small gain despite holding it for two fulll weeks. Ofcourse the index has moved up by about 1.8% on two weeks closing basis. Maybe my credit spread strike were too close to the spot level (6100 - 6200 call credit spread, current spot is 6135). So a good learning, I think if the credit spread strikes would have been 6200 - 6300 or 6300- 6400 then the profit would have been much better. Good learning on strike price selection.
Reki
My call credit spread which I took two weeks ago is as follows:
Call 6100 (2 lots) sold at 131, present price = 78 ( Gain = 53 rupeees)
Call 6200 (2 lots) bought at 81, present price = 29 ( Loss = 52 rupees)
So net gain as on yesterday weekend closing is 1 rupee. This position I took two weeks ago.
I am quite amused to see such a small gain despite holding it for two fulll weeks. Ofcourse the index has moved up by about 1.8% on two weeks closing basis. Maybe my credit spread strike were too close to the spot level (6100 - 6200 call credit spread, current spot is 6135). So a good learning, I think if the credit spread strikes would have been 6200 - 6300 or 6300- 6400 then the profit would have been much better. Good learning on strike price selection.
Reki
I have closed my position of friday at closing time, so I do not have any position for expiry week. Because initially I have view that the market will move beyond 6300 by oct end expiry, it has not shown clear sign for last three weeks. Maybe it my go above 6300 for all you know, but since there have been not such indication for last three weeks put together, I have decide to close my strategy with small profit of 12 rupees per lot which I earned in the first week itself. The 2nd and 3rd week profit was zero.
Reki
Reki
Hi Mangup, I have read about delta neutral strategies but not done such thing with real money. I have read it elsewhere in this forum that practically it is very difficult to do delta neutral strategies for small investors like us who do not have proper tools and execution speeds. I have no idea how to do it for weekly or monthly types of traders.
Reki
Reki
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