F & O use to buy and sell a share

[jigs080806]

Hi group,
I have not done a single trade in future and option but have read about how it works. After reading about the derivative markets I was wondering if I can apply the following strategy to buy or sell a stock.
1) Can I use option route in case I want to buy a stock?
Example, I want to buy Reliance Petro @ 60 Rs/ share. If I buy it from euity market I pay Rs 60 + Brokerage. But if I underwrite a put option with strike price of 60, I get some premium. And I get the shares only if the price is below 60 else I just keep the premium. Is it a good strategy for buying and selling? How much minium quantity I have to buy or sell? How much margin I have to keep (for underwritting call option)? How does it gets squared off & when? Also please give me any other information which I am missing here.

Thanks in advance...

 

[ronald_peterson]

Hi group,
I have not done a single trade in future and option but have read about how it works. After reading about the derivative markets I was wondering if I can apply the following strategy to buy or sell a stock.
1) Can I use option route in case I want to buy a stock?
Example, I want to buy Reliance Petro @ 60 Rs/ share. If I buy it from euity market I pay Rs 60 + Brokerage. But if I underwrite a put option with strike price of 60, I get some premium. And I get the shares only if the price is below 60 else I just keep the premium. Is it a good strategy for buying and selling? How much minium quantity I have to buy or sell? How much margin I have to keep (for underwritting call option)? How does it gets squared off & when? Also please give me any other information which I am missing here.

Thanks in advance...

First thing let me tel u in India u dont get shares. the options are cash settled.
2nd if by Underwriting u mean writing a put option yes u do get a premium 3,517.50 but if u see the OPT-RELPET-31-Aug-2006-60-PA there was no volume at all.
3rd if the price moves below Rs 60( strike price) u will be eligible to pay the difference between the Strike and the Spot Price. the Lot size or the minimum no of shares is 3350. So ul land up paying Rs 2*3350.

4th U dont have to have any margin beacause Ul be writing but if u buy
premium is going to be 3,517.50 which u hav to pay.

5th there are two ways by which an Option contract can be quared off
one by selling(if ur buying) or buying if u Write an option
or by exercise.
Be careful as options is a complex set of securities where u hav to hav a lot of knowledge. Go to ICICIDIRECT.COM home page> Icici direct university and read the Options part.

Njoy

 

[jigs080806]

Thanks a lot Nijoy for your detailed reply..till the time I was under impression that if I underwrite put option, seller can sell me the shares at the strike price. I was not aware that it is only cash settled..
Yes now I feel I should study more before doing anyhting in option market..
once again..thanks..

 

[Agilent]

First thing let me tel u in India u dont get shares. the options are cash settled.
2nd if by Underwriting u mean writing a put option yes u do get a premium 3,517.50 but if u see the OPT-RELPET-31-Aug-2006-60-PA there was no volume at all.
3rd if the price moves below Rs 60( strike price) u will be eligible to pay the difference between the Strike and the Spot Price. the Lot size or the minimum no of shares is 3350. So ul land up paying Rs 2*3350.

4th U dont have to have any margin beacause Ul be writing but if u buy
premium is going to be 3,517.50 which u hav to pay.

5th there are two ways by which an Option contract can be squared off
one by selling (if ur buying) or buying if u Write an option
or by exercise.


Njoy

I dont think thats correct Ronald (Njoy ?) ... there are hefty margins for writing options, whether call or put.

Ain't I right Vince ?

AGILENT

 

[SGM]

I dont think thats correct Ronald (Njoy ?) ... there are hefty margins for writing options, whether call or put.

Ain't I right Vince ?

AGILENT

Hello

Writing Option

While selling a Put option we assume a risk equivalent to that of going long at the Strike Price, while reward (gain) limited to premium collected

In case of selling Call option we assume a risk equivalent to that of going Short at the Strike Price, while again the reward (gain) is limited to premium collected

Thus writing/shorting options is equivalent to taking a position on Futures, with limited but predefined prospects of gain.

As far as margin is considered the margin applicable will be same as for trading in futures of that script (aprox 20-25%, , which depends on your broker)

Regards
Sanjay

 

[ronald_peterson]

ya i agree im wrong and i was thinking abt this. Sorry for mistake and thanks Agilent and SGM.

Thanks

 

[Agilent]

Hello

Writing Option

While selling a Put option we assume a risk equivalent to that of going long at the Strike Price, while reward (gain) limited to premium collected

In case of selling Call option we assume a risk equivalent to that of going Short at the Strike Price, while again the reward (gain) is limited to premium collected

Thus writing/shorting options is equivalent to taking a position on Futures, with limited but predefined prospects of gain.

As far as margin is considered the margin applicable will be same as for trading in futures of that script (aprox 20-25%, , which depends on your broker)

Regards
Sanjay

Good inputs .

So if u are selling 675 TISCO Aug puts strike 500 for example today, you will pocket premium of around Rs 5k or 6k, but have to provide margin of > Rs 100,000.

You also face the risk of having to buy back the option at a much highr price if TISCO slumps soon for some reason (unlikely, u say ? ... remember, markets often surprise us ... and it's this unpredictability which endears them to us , like women to men )

All in all, not a v good 'option'

Right , Vince /Sanjay ?

AGILENT

 

[vince]

Right on both counts Agilent.

You got to learn to read the signals right in both cases and again its the experience which counts.

 

[tushars82]

Re: F & o queries

Tushar,
Hello everybody!
Happy INDEPENDENCE DAY!

I am very new to this site & hoping for good responce as u all always give.
I am trading in stocks for last 2 yrs & i wish 2 trade in f & o.
For last couple of months i am reffering this site ,icici direct.com and some books reg. this.But have some doubts & hope 2 get answer here.

1) If i write call or put approx. how much margin is reqd? is it very large?
2) If i sell call option of stock but then stock starts rising & i fear of call getting exercised can i buy futures of same to cover?
3) e.g. spot price is 100 Rs, If i sell OTM call option of 120stk & prem. of 5 Rs
and i recv. prem of 5 Rs. But at the exp. day spot price is 125 then what
happens? do i retain my prem ?
4) If i am bullish on stock and write OTM put but if trend is reversed & stock
starts falling can i sell futures on same stock and buy it afterwords to
cover my losses on short put ?
5) Is REL PETRO not available for option trading?
6) When i buy call on stock with stk. of 100 & prem of 10 my breakeven is at
110, i pay 10 Rs as a prem and on exp. if stock is at 110 then does call
go worthless & i lose prem?

I am sorry if i have asked too many queries, since i don't know much
about general procedure here.

Thanks in advance.

 

[vince]

Hi tushar ,

Here goes,

1) Margin required is between 10-25% of contract value. It is best to check with your broker for exact values.

2) Yes

3) Yes you retain the premium and pay the diff between spot closing and strike price.

4) Yes

5)RPL is available in fno.

6)No , you get Rs 10 as your option will be automatically excercised by the exchange.

Happy I- day to you too.