iCharts Discussions

[ConMan]

Dear All

I found trading on PE/CE options to be a safe strategy provided we know various strategies for different views on market/stocks. I am trying to learn as much about those strategies each day. Ill try and post my learnings as much as possible. Just wanted to make it clear that I am novice and still dont know A - Z of options. I would really need help of experts to understand these things better and also help people understand it.

Please do correct me if I am wrong.

TOPIC 1: BULL CALL SPREAD

Bull Call Spread - Buying Call Options At A Discount
Time decay of Extrinsic Value is the number one enemy of options traders buying call options. Having the value of those call options decrease each day the underlying stock fails to rise is certainly a painful ordeal. The Bull Call Spread helps to reduce the effects of time decay of those call options by Selling to Open (shorting) out of the money call options in order to partially offset the price of these call options. This reduces the effect of time decay on the position and also increases return on investment since part of the price of the call options have been offset by the sale of the out of the money call options. This effectively allows you to buy call options at a discount and is what makes the Bull Call Spread so popular in options trading.

When To Use Bull Call Spread?
One should use a bull call spread when one is confident in a moderate rise in the underlying instrument.

How To Use Bull Call Spread?
Establishing a Bull Call Spread involves the purchase of an At The Money or In The Money call option on the underlying asset while simultaneously writing (sell to open) an Out of the Money call option on the same underlying asset with the same expiration month.

Profit Potential of Bull Call Spread :
A Bull Call Spread profits if the stock goes up. When the stock goes up, the long call option profits while the short call option continue to decay in premium until it's strike price has been reached. From that point onwards, every move in the long call option is matched by an equal move in the short call option, resulting in no further profits.

The maximum profit potential of a bull call spread is therefore when the price of the underlying asset rises up to the strike price of the out of the money short call options and beyond.


Regards
Anand Rathi

[ConMan]

Step 1: Lets assume I expect Nifty to reach 4900 by EoM.

Step 2: Ideally I should buy in the money call/at the money call (4600) & sell the out of the money call (4900)

Step 3:
Buy 4600 calls at Friday closing Rs.203
Sell 4900 calls at Friday closing Rs.78

Net debit: Rs.125/- per lot.

Step 4: The best return will be when Nifty closes in the range of 4600 - 4900.

Maximum gross profit would be
(4900-4600-(203-78 )) = Rs.175/- per lot

Break even will be at Lower strike price + Net debit = 4600+125 = 4725.

Maximum loss will be Rs.125/- per lot.

Alternate Actions Before Expiration :

1. If the underlying instrument or stock is expected to continue to rise strongly beyond the strike price of the short call option, one could buy to close the out of the money short call option and then sell to open a further out of the money call option in its place.

2. If the underlying instrument or stock is expected to continue to rise strongly beyond the strike price of the short call option, one could also choose to buy to close the out of the money short call option and then simply allow the long call option to continue to gain in value.

Hope this helps....

[ConMan]

Hi All

4600 calls at today's closing Rs.244
4900 calls at today's closing Rs.98

Nifty at 4711.

Regards

Anand Rathi

[ConMan]

Hi All

4600 calls at today's closing Rs.208.5
4900 calls at today's closing Rs.77.45

Nifty at 4679.

Rgds

[ConMan]

Hi All

4600 calls at today's closing Rs.150
4900 calls at today's closing Rs.49

Nifty at 4578.25.

Rgds

[ConMan]

Hi All

4600 calls at today's closing Rs.75.25
4900 calls at today's closing Rs.18.45

Nifty at 4437.65

Strategy for bear call will be explained next

[ConMan]

Hi

I think I started off too abruptly without discussing the basics...in fact I got to know lot of basic stuff yesterday while chatting with experts..I would like to thank Svkum, Jimmie, Nilesh Gala & other experts for patiently answering my queries.

First things first:

What is a PUT/CALL?

You buy PUT when you feel the market will go down & buy a call when you expect the market to go up. Alternatively one can sell a call if he expects market to correct and sell a put if he expects the market to gain.

There are two kinds of options...American & European...it wont bother our day to day life so lets skip it.

Important Things to note

Factors affecting the price of an option

1. Strike Price (it is nothing but the price of the option for which you are paying/getting premium for)

2. Volatility (available in NSE site)

3. Time to expiry (the closer the time to expiry the lesser the premium you need to pay)

4. Finally the current market price (yes offcourse)

Hope I am right till now....experts please clarify if I missed any...

I have seen lot of people asking about options in SB including me....hope this exercise with expert guidance works...

Regards
Anand Rathi

[shekharinvest]

bullishanand

It is nice to see a thread started by you on options.

It will help ppl like me to understand options and its strategy.

Although, you have skipped explaining options american and european, but the question remains which one to prefer- to buy or sell on NSE for whatever reasons.

I have seen many a times ppl suggesting as BUY CA or BUY CE instead of simple buy CALL.


Thnx

SHEKHAR

[vsp1964]

Dear Mr. BullishHand

First of all i am thankful to you to take this subject and explain clearly to new option traders. Sir, I would like to know about option calculator. After feeding all the datas which required by the option calculator software finally we get some result, then with the result how to judge whether we should buy/sell above the figure or below, is there any indicator, pls guide me sir. Hope u understand my point, pls reply through forum or to my mail id mani_ajit2003@yahoo.co.in
Thanks
vsp

[ConMan]

Dear Vsp

BullishHand ????? Sorry my name is Anand...



About the option calculator...please not that with the option calculator you can only figure out the right price to buy/sell an option at a particular strike price....its just an estimation of option price basis strike price...

Example:

if you expect the market to go down to 4300 with CMP being 4582 & so wish to buy this option when the market goes to 4600....lets say the right price to buy this PUT basis input figures is 80....you should look at buying the PUT around the Rs.80....

Hope this clarifies...

[ConMan]

Sorry Shekhar completely missed your query....

Let me make it clear:

US method = exercise any time [all stock options are American, has PA (Put American), CA (Call American), as Option Type],
EU method = exercise only on last day. [All index options are European, has PE (Put European), CE (Call European) as Option Type]

Difference is only with the "exercising power," trading part is similar in both American and European options.

And exercising means, force the contract seller to give you the price difference (as cash settlement is used in India over Delivery based settlement elsewhere).

[ConMan]

Another interesting thing that I learnt from SB...Put Call ratio (PCR)....

Well we have all heard about crowd pshchology/herd mentality....now everyone would be thinking where do I get an idea about the same....is there an indicator....probably PCR can help you in this....

PCR - stands for Put Call ratio which is nothing but total open interest in all the PUTS for the particular month divided by total open interest in all the CALL for the particular month....

Now what does it imply....if lot of people are bearish....they would looking for buying PUTS and ignore CALLS....now when everyone is bearish,the market does the ulta....so goes up....

PCR implies nothing but the degree of bearishness people have on a stock/index for the particular month....so if you see a particular strike price having high PCR...you can safely assume...I stress assume....that might be the maximum market can go down to....I have just attached the PCR of individual strike prices and for Nifty on a whole....we can therefore assume that this month Nifty will not close below 4300 (high PCR - 6).

Strike Price PCR
 3400.00  1.318831761
 3500.00  3.831804281
 3600.00  22.2867784
 3700.00  22.192
 3800.00  25.29368576
 3900.00  25.44177671
 4000.00  9.000314465
 4100.00  10.9378116
 4200.00  15.85462274
 4300.00  6.004912085
 4400.00  1.474139031
 4500.00  0.59640013
 4600.00  0.363157766
 4700.00  0.188460914
 4800.00  0.066356517
 4900.00  0.01039366
 5000.00  0.036442346
 5100.00  0.003457907
 5200.00  0.022582556
5300.00 0.181124523
NIFTY 0.947726

Yet again this is just another indicator...it can be swayed because of lesser participation i.e volume....extreme volatility....

Regards
Anand Rathi
 

[ConMan]

The PCR seems to be increasingly suggesting that the market will find it really tough to go below 4300 as in that case lot of people will make money....

So on the contrary one can start looking at selling the PUTS below 4300 from tomorrow onwards to take home the premium amount. PCR table for few strike price attached

Call OI Strike Price Put OI PCR
312,350  4000.00  2,984,800 9.555946854
181,100  4100.00  1,976,000 10.91109884
222,550  4200.00  3,984,800 17.90518984
806,550  4300.00  6,061,150 7.514909181
2,722,250  4400.00  4,623,600 1.698447975
5,019,950  4500.00  3,505,150 0.698244006
4,360,350  4600.00  1,722,150 0.394956827
4,438,100  4700.00  777,900 0.175277709
3,402,250  4800.00  200,400 0.058902197

[san77s]

Hello Anand,
Your PCR explanation very use full to understand with data.
Thanks & Regards,
S.Saravanan

[ConMan]

Thank You Saravanan...