A Beginner's way to trade options.

[anandraos]

Thank you very much Smart Trade. What one should take at current levels for this month.

 

[Smart_trade]

Thank you very much Smart Trade. What options one should take at current levels for this month.

If market goes above 4340-50 one can buy 4300 or 4400 calls for May expiry only if market going up strongly...limping market will eat into the premiums by rapid time decay which will come into play.

Smart_trade

 

[TFL]

Dear ST,

a. What are the pitfalls in going with ATM LONG PUT and CALL?
b. What are the things we need to consider while opening such a position?
c. Do we need to do any calculations on to check whether the current premium of there ATM options were ok to open the position?

Please educate us regarding this strategy when you have some time.

Thanks,

 

[dhinakar113]

If market goes above 4340-50 one can buy 4300 or 4400 calls for May expiry only if market going up strongly...limping market will eat into the premiums by rapid time decay which will come into play.

Smart_trade

ST Sir,
Do you advise to take 4300 - 4400 calls with hedging or naked? Which puts can we buy for hedging? 4100 - 4000 puts okay? pl enlighten.

Regards

 

[Smart_trade]

ST Sir,
Do you advise to take 4300 - 4400 calls with hedging or naked? Which puts can we buy for hedging? 4100 - 4000 puts okay? pl enlighten.

Regards

I dont advice buying any options for May series as the effect of time decay will be large for last 6 days we have in May....

However if you sense a strong move,buy 4300 calls for upmove and puts for downmove for quick gain and get out of the position if the anticipated move halts so that effect of time decay will be minimum.

I donot think one should buy 4100-4000 puts for hedging as 4100-4000 level looks a good floor for prices atleast for next 5-6 days.

Smart_trade

 

[Smart_trade]

Dear ST,

a. What are the pitfalls in going with ATM LONG PUT and CALL?
b. What are the things we need to consider while opening such a position?
c. Do we need to do any calculations on to check whether the current premium of there ATM options were ok to open the position?

Please educate us regarding this strategy when you have some time.

Thanks,

Hari,

This will need a little detailed reply.....will it be ok if I reply in the evening after the markets ?

ST

 

[TFL]

Hari,

This will need a little detailed reply.....will it be ok if I reply in the evening after the markets ?

ST

Very much ok dear ST...I didn't expect a reply till the weekend.

 

[Smart_trade]

Dear ST,

a. What are the pitfalls in going with ATM LONG PUT and CALL?
b. What are the things we need to consider while opening such a position?
c. Do we need to do any calculations on to check whether the current premium of there ATM options were ok to open the position?

Please educate us regarding this strategy when you have some time.

Thanks,

ATM puts and calls are expensive and the premiums we pay are large.For buying ATM calls and puts (if they are of same expiry and same strike price it is called a straddle) you have to consider volatility in the market....the implied volatility....larger the volatility means more expensive the straddle buying is.But if one is expecting a large move in one direction,then buying a straddle is correct inspite of large premiums....

If you buy a straddle and market moves by small amount say 50 points in Nifty,if it goes up,the calls will appreciate by about Rs 25 and puts will go down by 25 and the time decay acts on both so you really make nothing but loose because of time decay....so unless you get a move of over 100-150 points in one direction straddle buying is a loosing proposition.

You get standard option calculators where you feed the variables like volatility,risk free rate of return,number of days till expiry,strike price etc and you get the correct value of the premiums....Many brokers sites have these calculators. Sharekhan has one on its site.

If large move is not expected and implied volatility is high,then it is better to sell the straddle and pocket part of large premium. But then one is exposed to high risk and it is like a "chakravyuha" one needs to know how to get out of it if things turn sour....recommended only for experienced traders with deep pockets....

If the expected move takes time to come through, then straddle buyer has disadvantage of time decay of both contracts working against him.

Hope I have answered your querry.

Best Wishes,Trade well...and safe...

Smart_trade

 

[TFL]

ATM puts and calls are expensive and the premiums we pay are large.For buying ATM calls and puts (if they are of same expiry and same strike price it is called a straddle) you have to consider volatility in the market....the implied volatility....larger the volatility means more expensive the straddle buying is.But if one is expecting a large move in one direction,then buying a straddle is correct inspite of large premiums....

If you buy a straddle and market moves by small amount say 50 points in Nifty,if it goes up,the calls will appreciate by about Rs 25 and puts will go down by 25 and the time decay acts on both so you really make nothing but loose because of time decay....so unless you get a move of over 100-150 points in one direction straddle buying is a loosing proposition.

You get standard option calculators where you feed the variables like volatility,risk free rate of return,number of days till expiry,strike price etc and you get the correct value of the premiums....Many brokers sites have these calculators. Sharekhan has one on its site.

If large move is not expected and implied volatility is high,then it is better to sell the straddle and pocket part of large premium. But then one is exposed to high risk and it is like a "chakravyuha" one needs to know how to get out of it if things turn sour....recommended only for experienced traders with deep pockets....

If the expected move takes time to come through, then straddle buyer has disadvantage of time decay of both contracts working against him.

Hope I have answered your querry.

Best Wishes,Trade well...and safe...

Smart_trade

Thank you dear Smart_trade for the reply. I have a bulk of questions regarding various option strategies not in theory but about practical cases. Will be making you busy.

 

[teenguy]

i have a question...if some one could answer it...

suppose i write 1lot call 4300 nifty option at some premium price...when nifty was at
4200.


now on expiry date if the nifty is about to close at 4400.just before the closing on expiry if i try to square off the premium is 120.
it is 20 more than the difference between my strike price and currentprice(100).


my query is if i dont square off on the last day then the nse will squareoff automatically for me.so at what premium price will it square off.
100(which is the actual difference) or 120 which was the last offer price.

thanks in advance.