A Beginner's way to trade options.

[kpp]

Hello All,

I am very new to Options Trading. Can you please explain few basic questions below:

Here I have taken 2 days of Suzlon information. 13th and 17th NOV.

On 13-NOV-09 SUZLON: 67.40 (Current Price)

BUY CALL@ 65 PREMIUM= 5.55 * 3000 QTY = 16650 26/11/2009 EXPIRE
BUY CALL@ 70 PREMIUM= 3.05 * 3000 QTY = 9150 26/11/2009 EXPIRE
BUY CALL@ 75 PREMIUM= 1.65 * 3000 QTY = 4950 26/11/2009 EXPIRE

On 17-NOV-09 SUZLON: 73.10 (Current Price)

BUY CALL@ 65 PREMIUM= 9.00 * 3000 QTY = 27000 26/11/2009 EXPIRE
BUY CALL@ 70 PREMIUM= 5.25 * 3000 QTY = 15750 26/11/2009 EXPIRE
BUY CALL@ 75 PREMIUM= 2.75 * 3000 QTY = 8250 26/11/2009 EXPIRE

On 13th NOV, Suzlon running@ 67.40/-.
On 17th NOV, Suzlon running@ 73.10/-.

1. On 13th NOV, Suzlon running@ 67.40/-. So can I buy a Call@65 though the current price is [email protected]/- which is hight than the strike price? Will it be having any advantage if I buy a Call where the Strike Price is less than the Current Price?

2. Lets say on 13th I did BUY CALL@ 65 PREMIUM= 5.55 * 3000 QTY = 16650 26/11/2009 EXPIRE. Remember Suzlon running@ 67.40/-.

Will I get profit of 3.45/- premimum on each share if I sell the call on 17th?

3. By looking on both dates, can you explain me the best option that would have taken on 13th to get good profit?

4. I have account in ShareKhan, but not sure how to do the Options Trading. Can anybody provide 2 screen shots on how to buy a call and sell a call pls pls?

Thanks,
Venkat

hello st / other contributors to this thread

thanks for this useful thread :thumb: . i'm new to f&o and have similar questions. can anyone of you please answer above questions.

 

[AW10]

kpp/ venkat,
my sincere suggestion to both of u is to do basic reading on options fundamentals. following are 3 good sources..
1) CBOE dot COM website
2) 888options dot COM
3) Material on derivatives module on NSEIndia certification section..

Most of your doubts will get answered there.

Hello All,
1. On 13th NOV, Suzlon running@ 67.40/-. So can I buy a Call@65 though the current price is [email protected]/- which is hight than the strike price? Will it be having any advantage if I buy a Call where the Strike Price is less than the Current Price?

Yes u can buy any strike point for option. There is concept of In-the-Money / At-the-Money / Out-of-the-Money options (ITM/ATM/OTM). You can buy any strike irrespective of the spot price.
Though the behaviour of premium movement will differ for each strike as spot price keeps moving.

2. Lets say on 13th I did BUY CALL@ 65 PREMIUM= 5.55 * 3000 QTY = 16650 26/11/2009 EXPIRE. Remember Suzlon running@ 67.40/-.

Will I get profit of 3.45/- premimum on each share if I sell the call on 17th?

You can sell your option on 17th.. Your profit is always given by difference of )Sell Price - Buy Price) * Qty. Each option (eg - Suzlon 65 CA Nov / Suzlon 70 CA Nov) is unique tradable instrument on its own.

3. By looking on both dates, can you explain me the best option that would have taken on 13th to get good profit?

This depends on what u want to do.. there is no single answer. Each option will behave differently as suzlon moves. One will move faster then others (in both direction i.e. positive or negative).

4. I have account in ShareKhan, but not sure how to do the Options Trading. Can anybody provide 2 screen shots on how to buy a call and sell a call pls pls?

If you have trade tiger platform then in one of the dashboard, u need to add option instrument.. Find out how from help on how to add instrument in TradeTiger panel. If u have browser based acct then
goto F&O trading link. Select NIFTY.. and then u get 2 liner order entry screens. On that screen, there are various dropdown box to select Future or option / Call or Put / Expiry Month/ STrike price/ limit or market price.. etc.

Hope this helps..
Happy Trading

 

[tradenifty]

Hi AW10,

I have a question. I am confused regarding margins given for trading in options. As per my broker, the margin for nifty options is around 17%. Does it mean that i can buy a 5000 PE at cmp 46.35 with an amount of around Rs.400/-. Please reply.

regards,

 

[AW10]

It is 17% of contract value.. i.e. 1 contract (i.e. 50 units) of 5000 call has value of 50*5000 = 250000. and 17%
of that is 42500/- Rs.

I think, ur broker is charging a lot. Generally the margin shd be in the range of 30 to 35k.

Happy trading

 

[Smart_trade]

Hi AW10,

I have a question. I am confused regarding margins given for trading in options. As per my broker, the margin for nifty options is around 17%. Does it mean that i can buy a 5000 PE at cmp 46.35 with an amount of around Rs.400/-. Please reply.

regards,

For buying any contract you have to pay full premium upfront which means you have to pay the premium * lot size ( 50 in this case) plus brokerage and other charges....

Margin is applicable when you sell options...and is applicable on full value of the contract...and not the premium.

Smart_trade

 

[AVINDADA]

Dear Sir,
I have Bought Nifty Calls and Put of Feb 2010
5000CE at 85
5100CE at 55
5200CE at 34

Also holding the Puts of
4700PE at 95
4800PE at 120.

Please guide me how to close these positions in Profit?

 

[samip2u]

It is 17% of contract value.. i.e. 1 contract (i.e. 50 units) of 5000 call has value of 50*5000 = 250000. and 17%
of that is 42500/- Rs.

I think, ur broker is charging a lot. Generally the margin shd be in the range of 30 to 35k.

Margin Calcuations:
How actually the margins are calculated in option writing?
I used to think, its some fixed % of the contract value. But if thats the case why do i see different margin req. for diff. Options... there is no fixed margin% with icici direct.

SHORT 4500PE: margin needed = 15750... so, margin:7%
SHORT 5200CE: margin needed = 19500, when with 7%, it should be 18200

Moreover... the margin req. are far more for ITM options ( ard 20% of the contract ), if you are shorting them...

is there any specific% which a trader can try to maintain to avoid automatic squareffs... rather than keep checking the margins and reports from the broker?

 

[AW10]

Refer to FAQ on margin calculation inside ICICIDirect site / F&O section help..
Charged margin also has a component related to real obligation. So if u short ITM options, ur obligation is much higher.. compared to OTM options where obligation has not
yet kicked in.

This also depends on the devaition from current mkt price.. For nifty at 4900, ur 4500 put is 400 points away,.. whereas 5200 call is 300 points away.

So probablity of 5200 call getting ITM is higher then 4500 put getting ITM (that is theoratical buy in my observation, market falls faster then they climb..so 4500 put will get much faster, if mkt has to crash).

If you really want to track it closely then u can pickup the formula's for margin calculation from yr broker's site (appoximate will also be fine) and anticipate your margin requirement for various levels of nifty.
Else just leave a buffer of 20/30% on top of actual margin required.

Hope this clarifies your doubt and helps to some extent.

Happy Trading

 

[VJAY]

Dear AW10 sir,
Please give some guidance about my papertrades......

http://www.traderji.com/options/37714-papertrading-linkons-strategy.html#post408196

 

[rrmhatre72]

Let me attempt to address them in as simple was as I can..

Delta = Amount of Change in Premium for 1 Rs. change in Nifty. So delta = +0.4 means the option price will change by 40 paise for each 1 point move of nifty.
Calls have +ive delta i.e. call premium increases by increase in nifty. Puts hace -ive delta.. cuase their premium drops as market goes up..
ATM options have delta = 0.5
ITM options have delta > 0.5, Far deep ITM option have delta approaching towards 1..
OTM option have delta < 0.5. Far OTM options have delta near 0.
As option gets more and more ITM, its delta will start increasing..

Gamma = Show the spead of change in delta.. To keep it simple. Just forget about it for the time being. Generally its value is like 0.001xx .. i.e. 1/1000 of a Rs.
shall I really care of 1 paise change.. and overload my mind.. ? (Maybe u can go those details later. Just understand the way Delta changes as described above, and u get a decent ground).

Theta = Rate of premium decay for each passing day of options life.
So if theta is 3, means, on each passing day, option premium will change by 3 rs.
For long position, theta works -ively.. and for short position theta is +ive.
As we approach towards expiry, the time premium eventuly goes toward 0. Theta shows us at what speed it will go towards 0.

Again to keep it simple. Calculate the time premium that u are paying in the option.. and divide that by days left.
Option premium has 2 parts = intrinsic value or real value and time value or value of air around that option.
eg = mkt at 4535, 4500 call option is trading at 64 rs. So the intrinsic value = 4535 - 4500 = 35 rs.
Whatever u pay beyond real value is time value i.e 64- 35 = 29 rs.
So if remainig life is 10 days.. i.e. roughly u will loose 29/10 = 2.9rs everyday.

Ideally timedecay follows expontial curve.. but using above calculation , we will follow linear curve.. doesn't make much difference..in trading.. but makes differnece if you are plannig to do research

Vega = Reflects the impact on premium due to change in underlying volatilty. Sounds great.. but complicate to calcualate.. so let me try to make it simple..
When expected voliatity in remainging life of option is high, then option seller wants more money.. so premium goes up. Option premium depends on what is gong to come (i.e. right side of the chart)
not the left side.. hence lets use our judgement to find if mkt is going to go thru big swings in next few days or not. (election result, economic news, company result etc are typical events that result in higher volatity).. In such scenario.. the time value calculated above will go up.. so the 64 rs option might start going for 80 rs.. i.e u are paying 80-35 = 45 rs for remain 10days of time.
that gives us theta of 45/10 = 4.5 rs.
So if you just practice above simple calculations.. without going into the complexity of vega, u can find out if option is fairly price (i.e u are paying decent money for per day of time). or it is
exorbitantly high money that option write is asking from you.
With practice, u can find out the typical time premium / day.

Volatility is important concept in option but it gets reflected in time premium. So to keep it simple, just focus on time premium and understand it as best as possible.

Rho = forget it.. Doesn't make much difference.. cause it has minimum effect on pricing. And Interst rate don't change everyday..

To summarize, just understand Delta and Theta first / their movement with respect to ITM/OTM/ATM..
Then look at Gamma / Vega / Rho (when u have time....)

Hope I am able to keep it simple. (There is fair bit of approximation which is used here.. so what, whatever model u use and get the price, real market price of option can still be different form that. So
as a trader, we need to live in reality and use the pricing concept to understand what is going on.. and what shd be our trading decision / which strategy should fit well etc.)

If you understand above concepts, then u will know that there are time when buying option is wrong (low volatility ahead) and there are time when selling option is wrong (high volalitility ahead)..

Any question / doubt.. feel free to fire here..

Happy Trading

too good.
I never find such a simplified version of all these critical parameters
Thanks buddy....

Rahul