iCharts Discussions

[ConMan]

I know many people would be confused about options strike price....atleast I am

I have been advised to buy Out of Money (OTM) options most of the time but it has particularly not worked for me....nor for ppl whom I know also.

I have a little inclination towards In The Money (ITM) options....now the question would be why? which ITM option & how to find the best one.

Before reading ahead please be clear that I am not positioning Options as a lottery ticket gamble here....its a pure simple investment strategy. I might be wrong,please do correct me.

Question 1: Why ITMs?

Answer: Volatility will not affect the pricing of ITM options as the current Market price is well above ITM strike price. The cost of acquiring the option is lower (yes!!!) than acquiring At The Money (ATM) options or OTM options.

Example: Nifty CMP:4997
Assuming your strategy suggest to go long at these levels...you can either buy ATM,OTM, ITM options.

Cost of Buying ATM: say 4900 CE is 155.80 - 97 = 58.80 (multiply by 50 = Rs.2940 already lost) (taking lieberty here)

Cost of Buying OTM: say 5100 CE is 47.10 (multiply by 50 = Rs.2355 already lost) plus you are sure to lose all the money till 5100 levels. So your invested money is not working for you for sometime.

Cost of Buying ITM: say 4700 is 318 (4700+318- 4997) = 21 (multiply by 50 = Rs.1050)

So I would say OTM is completely ruled out & between ITM/ATM, I would clearly choose ITM cos its available at a cheaper cost.


Question 2: Which ITMs?

Answer: Buy that ITM options which is trading at the least premium. Taking the above mentioned case,

Cost of 4800 ITM is (4800+232.7-4997) = 35.7
Cost of 4600 ITM is (4600+408-4997) = 11
Cost of 4400 ITM is (4400+605-4997) = 8
Cost of 4500 ITM is (4500+509.9-4997)= 12.9

Now I can decide to buy either 4600 or 4400 ITM. Which can be left to the individual investor's investment capital. I would probably look at 4600 (cos here the cost differencial is not high). There are times when ITMs can trade at discount also. If you find one grab them with both hands, I say.


Again, your question would be,if the market goes against us we will lose only limited money in OTM/ATM options. I would say what are SLs for? Place SLs in options & trade, you will not see more losses than ATM/OTM options.

Look at the other side of the coin, if market moves as per your trade system suggestion you would definately make an average of Rs.2500-3000 more per options (Than ATM) & atleast Rs.6000 more than OTM options.

This is how I would position options against Futures. So one can be happy with taking same position as futures at much lower cost + no more calling by brokers to fund margins ....

Hope this makes sense....more on how to close options later....

TATA .... QGM

[smsmss]

[Cost of Buying ITM: say 4700 is 318 (4700+318- 4997) = 21 (multiply by 50 = Rs.1050) ]

so QGM are u saying that when we will buy 4700 ITM at premium 318, then only 21*50 will be deducted from our a/c and not 318*50?

a naive question imust say for you but plz do answer it.....

[ConMan]

Rs.318*50 will be deducted from the account smsmss...but the premium is 21 points