A Beginner's way to trade options.

[abigbull]

Please don't mind as i am just picking the funda of options , but here on a practical note just wanted to understand what should be a good options bet for the october series .

Experts pls suggest a simple yet affective strategy with Call Buy / Write with Put Buy / write for oct 09 which can help .
My belief is that too an emotional one that Nifty having reached 5000 will face resistance may go to 4900 - 4850 and then will again bounce back to 5200 may be till oct end .

Is this the right way of thinking and then wld like to plan a Put - Call strategy which provides me buffer as well as give me reasonable premium profit due to time decay . Hope this will be a good learning exercise .

Is the following right approach .
1> Defensive
Sell Call 5400 @ 19 ( As i think it will not reach 5400 Nifty in oct )
Sell Put 4700 @ 52 ( As i think it will not drop to 4700 Nifty in oct 2009 )

2 > Bit aggressive
Sell Call 5300 @ 34
Sell Put 4800 @ 76

But here in case the Nifty follows a trend in one direction i will lose money so what should be my right " write option " strategy for Oct no when the nifty is in ( 4950 - 5000) range ......

Thanks in advance as this is for my learning .
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[sumosanammain]

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[ppmatkari]

I have sold a strangle (call at 5200 & put at 4800), expect nifty to remain rangebound this month plus Diwali holidays will decrease the no of working days. I have sold 5200 call at rs 54 & 4800 put at 62, wht i wud like to know is whether these rates are too low, should i try & square off & reenter these positions at higher premium rates & possibly widen the range on lower side (4700 instead of 4800). Brokerage charges are rs 100 per lot... Will it be feasible?

 

[AW10]

i am still quite confused between square off and exercise...pls clear me if i am wrong
now say i buy a nifty call at say 5300 at a premium say 36 current after some days markets went high i squared off and booked my profits which was diff*lot size....

Billgates786. You are right here. In simple terms,
Sqaureoff = close your position by buy/sell in open market.
For this to take place, u need the other party (i.e if you are selling then there has to be a buyer). If there is no other party available, then u can't use this option. That means, u are stuck due to lack of liquidity.

now say i buy a stock option at xyz strike at a premium after some days it rise and i squared off ...now say liquidity is dried up..what really happens to my square off ..do u call this in between square off when premium is higher than buy price as a square off or exercize..will my contract will be square off if liquidity is dried is yes then how will i book my profits

As far as I know, there are only two ways to close your position -squareoff in open market or Excercise it. If both these choices are not made till the day of expiry, then on expiry day, exchange will forcefully excercise and close the open position.

Here, due to absence of other party, u can't squareoff yr trade. You are left with choice to "Excercise your rights" and ask exchange to settle and close your position. This excercise is done at the settlement price of that day. which is approximately equal to the spot price.
Your profit will be say for call option = (Settlement price - strike price)*contract Size.
Here u don't get any time premium.. so market price /premium etc is of no use.

You can excercise yr option, only when u own the option i.e you bought it.. If you have sold such stock option and there is no buyer now.. then you are stuck with your obligation and u have no control to cut the loss.

In such condition, u can buy different strike price or take some other action and adjust your position. so that atleast your loss remains in defined limit. But that is entierly different topic - adjusting option positions. Unfortunately, more u know about option trading, more choices you will have to adjust.

Hope this clarifies your doubt.

Happy Trading

 

[AW10]

Things are getting pretty clear now so one final word abt M2m that is goin to get cut ...if write call or puts and position is opposite to me how much they cut m2m take example of nifty i play in nifty options only......

Can u plz search the forum where someone has given detailed calculation of this. Alternatively u can also look at the help on margin calculation on your brokers site.

and one more can i write calls intraday only..like say is sell at higher premium and buy at lower premium now suppose that transaction get finished in a day only the is there issue of exercize...pls clear this doubt....

.............bye

Be clear in understanding - Excercise can be done by option buyer. Seller can't excercise.
If some buyer wants to excercise his right, then he places the order thru his broker, order reaches exchange.. and then exchange randomly assigns it to any other option seller who has open short position at that time (same strike, same stock, same expiry).
So as a seller, you can only get assigned.

Trade transcation and settlment are two different process in trading. Excercise/ Assignment belongs to settlment.. which happens in the evening after the market is closed. So if you closed your position during the day, then your transction will not go to settlement cycle.

For more clarity, please read about this settlement process from the material available on NSE site, certification section.

Happy Trading

 

[huineng]

Whenever I try to calculate the price of options, I get stumped by the question : What is the interest rate? Is there a interest rate for NIFTY? I know that there is a dividend which is 1.02. Is there an interest rate which is risk free? Please guide. Thank you

 

[Smart_trade]

Whenever I try to calculate the price of options, I get stumped by the question : What is the interest rate? Is there a interest rate for NIFTY? I know that there is a dividend which is 1.02. Is there an interest rate which is risk free? Please guide. Thank you

Interest rate in calculation of option premiums is the risk free interest rate which one will get on AAA risk free, safe investments such as Govt or RBI bonds....presently you may take it as 6% or so .....

Best wishes,

Smart_trade

 

[huineng]

Thank you sir! Please tell me if it is applicable to Nifty index options. Sorry for trying your patience. Looks like the 50 companies which comprise the Nifty may invest in Govt or RBI bonds and the interest yield is taken in to account when the option premium for the Nifty index is calculated. Is it that way?

 

[lazytrader]

Risk-free int rate 4.75% now I guess

 

[abigbull]

just wantd ur advice about options :
If i have the view that the Nifty will go up in nov ,will buy the next months call after 20th of Oct month . What should i do in options to hedge the : Buy Nov 5200 . Call now . ? and how what should be my approach if i buy the 5200 CE nov call on oct 23 .
I mean what will happen if the nifty goes up , goes down , stays near this value of 5000- 5050 or what should be the right options that i should buy for nov when the Nifty has lost 150 pts from its peak .