Re: F & o queries
Dear Tushar,
Since most of your queries are already answered by Vince, I am just quoting a few para from "Come into my trading-room" by Alexander Elder. They are self-explainatory. And there is much more in the same book on option-writing, in general. I have heard a book by Indian Writer "Ashwin Mehta" titled "How to make money trading derivatives" is also a very good. I am sure you will do your home-work before considering options-writing. My friendly suggestion to you is to go for options buying first, see how good you are at predicting the "option moves". This is especially so because options market is very volatile, unlike stocks (especially Nifty) and there is a crucial element called "time value" which is not present in stocks. Your loss here will be restricted (although it can be as high as 100% of premium
). Once succeed in option-buying, you can consider option-writing.
-------
Excerpts from "Come into my trading room - Alexander Elder"
There are two types of option writers. Covered writers buy a stock
and write an option against it. Naked writers write calls and puts on
stocks they dont own, backing their writes with cash in their accounts.
Writing naked options feels like taking money out of thin air, but a violent
move can put you out of business. Writing options is a serious
game, suitable only for disciplined and well-capitalized traders.
Large funds tend to use computerized models to buy stocks and
write covered calls against them. If a stock stays below the strike price,
they pocket the premium and write a new call with a new expiration
date. If a stock rises high enough to be called, they deliver it, collect
the money, invest in another stock, and write calls against it. Covered
writing is a mathematically demanding, capital-intensive business. Most
serious players spread their costs, including staff and equipment,
across a large capital base. A small trader doesnt have much of an
edge in this expensive enterprise.
We must not forget that an option is a hope, and it is better to sell
empty hopes which are unlikely to be fulfilled. Take three steps before
writing a call or a put. First, analyze the underlying security, decide
which way its moving, and estimate its price target. Second, decide
whether to write a put or a call. Third, choose the strike price and the
expiration date for the option youll write. If any one of these steps
seems unclear, stand aside, do not force a decision, and look for
another opportunity.
Option writers get hurt in one of three ways. Beginners overtrade and
write too many options, breaking money management rules. Intermediate level
traders get hurt when they fail to run fast enough when their
options move against them. Experienced traders can get blown out if
they do not have a reserve against a major adverse move. The longer
you trade, the greater your risk of a catastrophic event. Having an insurance
account confirms your position as a professional option writer.
------
Regards,
Abhay (AAD)
Dear Tushar,
Since most of your queries are already answered by Vince, I am just quoting a few para from "Come into my trading-room" by Alexander Elder. They are self-explainatory. And there is much more in the same book on option-writing, in general. I have heard a book by Indian Writer "Ashwin Mehta" titled "How to make money trading derivatives" is also a very good. I am sure you will do your home-work before considering options-writing. My friendly suggestion to you is to go for options buying first, see how good you are at predicting the "option moves". This is especially so because options market is very volatile, unlike stocks (especially Nifty) and there is a crucial element called "time value" which is not present in stocks. Your loss here will be restricted (although it can be as high as 100% of premium
). Once succeed in option-buying, you can consider option-writing. -------
Excerpts from "Come into my trading room - Alexander Elder"
There are two types of option writers. Covered writers buy a stock
and write an option against it. Naked writers write calls and puts on
stocks they dont own, backing their writes with cash in their accounts.
Writing naked options feels like taking money out of thin air, but a violent
move can put you out of business. Writing options is a serious
game, suitable only for disciplined and well-capitalized traders.
Large funds tend to use computerized models to buy stocks and
write covered calls against them. If a stock stays below the strike price,
they pocket the premium and write a new call with a new expiration
date. If a stock rises high enough to be called, they deliver it, collect
the money, invest in another stock, and write calls against it. Covered
writing is a mathematically demanding, capital-intensive business. Most
serious players spread their costs, including staff and equipment,
across a large capital base. A small trader doesnt have much of an
edge in this expensive enterprise.
We must not forget that an option is a hope, and it is better to sell
empty hopes which are unlikely to be fulfilled. Take three steps before
writing a call or a put. First, analyze the underlying security, decide
which way its moving, and estimate its price target. Second, decide
whether to write a put or a call. Third, choose the strike price and the
expiration date for the option youll write. If any one of these steps
seems unclear, stand aside, do not force a decision, and look for
another opportunity.
Option writers get hurt in one of three ways. Beginners overtrade and
write too many options, breaking money management rules. Intermediate level
traders get hurt when they fail to run fast enough when their
options move against them. Experienced traders can get blown out if
they do not have a reserve against a major adverse move. The longer
you trade, the greater your risk of a catastrophic event. Having an insurance
account confirms your position as a professional option writer.
------
Regards,
Abhay (AAD)
