Writing options need help

[jeyaprakash84]

Dear Traders,

I am new to options, I need help on how to write a option. For writing a option, for e.g Nifty with a strike price of 5500 and expiry 26 Aug 2010, what should I do, should I select that nifty option, enter the lot size and give just sell (like short selling of stocks though I dont own it) or is there any other way. Kindly clarify.

 

[rkkarnani]

Dear Traders,

I am new to options, I need help on how to write a option. For writing a option, for e.g Nifty with a strike price of 5500 and expiry 26 Aug 2010, what should I do, should I select that nifty option, enter the lot size and give just sell (like short selling of stocks though I dont own it) or is there any other way. Kindly clarify.

First thing is : People entering Options should be very very careful in writing options. The clarification sought by you indicates (I may be wrong) that you are absolutely raw!!
Acquaint yourself with the hazards of Option writing before doing it.
As far as How to do it , what you have mentioned is correct. We do it just as we Sell any other Stock or Future.

All the best.

 

[jeyaprakash84]

Yeah. You are right. I am quite new. I am understanding options. I understand the decay of the time value which turns in favour of the options writer most of the time and I also learn that 80% of the options go unexercised. Though it said to be extremely risky to write options, writing deep out of money seems to be a quite reasonable that to near expiry. I am just exploring the options of options. Thanks for your prompt response.

 

[prashyrao]

Yeah. You are right. I am quite new. I am understanding options. I understand the decay of the time value which turns in favour of the options writer most of the time and I also learn that 80% of the options go unexercised. Though it said to be extremely risky to write options, writing deep out of money seems to be a quite reasonable that to near expiry. I am just exploring the options of options. Thanks for your prompt response.

Also understand the margin requirements. also know how many u want to write. 5500 on either direction is not that far away from 5395... also know how to hedge it or cap the risk. all the best, writing is not a bad thing as long as you know how to manage if the market goes against you and goes QUICKLLY!!! I mean, have 'insurance' in place even seconds before your writing. Otherwise, things can change rapidly in equity market.

 

[jeyaprakash84]

Thanks prashyrao for your inputs. Yesterday I sent a mail to my broker (one of the leading brokers) enquiring the procedure to write options. They told, you have to short sell the future and that is what is called writing options. Then, I called them to speak directly and the executive who attended the call is not at all aware of writing options. Even the customer care executives are not familiar with this.

Regarding the margin (as per their mail), they told, the amount required to purchase that lot would be required to sell it. Is that right? Kindly confirm? Is that the general requirement when it comes to writing options?

I was checking how a 'call' has responded over a month's time when the nifty moved from 5200 to around 5400, the value had not much changed. Though theoretically it is said that it could bring unlimited profits, the slow movement and the time value becomes a hindrance for that. I was quite shocked to see the value decay because of time. In a falling market writing a call looks highly profitable. I am still exploring the strategies. Also I learn that I could buy a similar options and close my position which is advantageous.

I would be happy if someone could add the protective measure when considering writing nifty index options.

 

[jeyaprakash84]

I understand that lesser the risk if it is more out of money. Now the nifty is trading around 5383. The buyer is ready to buy a Aug 5600 call only at around 17 even though there is a month for expiry. The premium is already is very less. Hope it would go to a single digit number in a matter of few days. So, writing the options near the expiry seems very less profitable. Do the writers generally write only near the expiry for a meager profit or they predict the trend and write well in advance. For example, now the MACD had changed its trend predicting a fall. Is it safe enough to write a call for a strike price of 5600? Is this safe enough?

 

[rkkarnani]

Thanks prashyrao for your inputs. Yesterday I sent a mail to my broker (one of the leading brokers) enquiring the procedure to write options. They told, you have to short sell the future and that is what is called writing options. Then, I called them to speak directly and the executive who attended the call is not at all aware of writing options. Even the customer care executives are not familiar with this.

Regarding the margin (as per their mail), they told, the amount required to purchase that lot would be required to sell it. Is that right? Kindly confirm? Is that the general requirement when it comes to writing options?

I was checking how a 'call' has responded over a month's time when the nifty moved from 5200 to around 5400, the value had not much changed. Though theoretically it is said that it could bring unlimited profits, the slow movement and the time value becomes a hindrance for that. I was quite shocked to see the value decay because of time. In a falling market writing a call looks highly profitable. I am still exploring the strategies. Also I learn that I could buy a similar options and close my position which is advantageous.

I would be happy if someone could add the protective measure when considering writing nifty index options.

Good to note that you are not entirely new. You know the risks involved and have done your initial home work. :thumb:
The margine for writing an option is same as that of buying or selling a Future.
If Buying or Selling one Lot of Nifty costs you say Rs.55000.00 as margin then short selling one lot of 5500 Aug call should cost you the same and at the same time you also receive the Premium for which the 5500 Call is Sold.

 

[prashyrao]

the thumb rule rkkarnani showed above is good enough, though actual margin could be different (read about SPAN margin from NSE site), especially for far OTM options. BUT, that is not the COST that you incur, it is the margin that you PLEDGE. You will get your margin back if your written position does not expire in the money by the expiry. The only COST in its real sense would be any payment you will have to make if it expires ITM and any reasonable risk free interest you could have earned on the margin money that you pledged.
Some brokers calculate the margin on the hedge. So, if you are writing a covered call, your margin would be released on T+1.
But again, do keep an eye on the market movements if you are naked short. One piece of news either overnight or during the day turn the tide against you!!

 

[jeyaprakash84]

Thanks rkkaranani and prashyrao for your valuable inputs.

 

[Capricorn]

Thanks prashyrao for your inputs. Yesterday I sent a mail to my broker (one of the leading brokers) enquiring the procedure to write options. They told, you have to short sell the future and that is what is called writing options. Then, I called them to speak directly and the executive who attended the call is not at all aware of writing options. Even the customer care executives are not familiar with this.

Regarding the margin (as per their mail), they told, the amount required to purchase that lot would be required to sell it. Is that right? Kindly confirm? Is that the general requirement when it comes to writing options?

I was checking how a 'call' has responded over a month's time when the nifty moved from 5200 to around 5400, the value had not much changed. Though theoretically it is said that it could bring unlimited profits, the slow movement and the time value becomes a hindrance for that. I was quite shocked to see the value decay because of time. In a falling market writing a call looks highly profitable. I am still exploring the strategies. Also I learn that I could buy a similar options and close my position which is advantageous.


I would be happy if someone could add the protective measure when considering writing nifty index options.

AWK ... change your broker friend