Low Risk Options Trading Strategy - Option Spreads

[abigbull]

sibumajumdar

Sibu SIr i know u r elder to me amost my Dad's age . but sir it doesn't pay to say thank u to everybody for every post .

again its ur personal choice and i do not have any concern ..just noticed that and mentioned it .

regards
abigbull ..

 

[DanPickUp]

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[pkusingh]

Hy

One of the questions was :

"for clearing my doubt . just on that front would like to know . when buying a option how or what are the ways to know if the volatility is more and the prices are infalted ?"

Here is one answer :

The difference between the futures price and the strike price is ALWAYS
equal to the difference between the prices of the put and the call.

EXAMPLE :

Future Sept. Coffee at : 135.20

Strike price of the put : 160.00


Put strike minus Future price : 160.00 - 135.20 = 24.80


24.80 is the difference between the call, which has a value in this example at the moment of 8.50 and the put 33.30 :
33.30 - 8.50 = 24.80

Look at the strike price and then look at the option prices. They must be all perfectly in line.
If they are not they will be overpriced or under priced.

If overpriced sell them and if underpriced buy them.

It also gives you an idea where the market can move to.

That is the way it works with American style options

DanPickUp

That is called put call parity, but holds only for european option.
The relation doesn't hold for American-style options.

You can create a portfolio where you have:
1-buy future
2-sell a call option
3-buy a put option with the same strike like the call option


So at the expiry you don't to pay anything because its completely hedged. So after brokerage price of this portfolio is greater then zero then long it or if less then zero short it, but its very unlikely that you will get any arbitrage opportunity in the market.

So it's not very useful.

 

[DanPickUp]

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[pkusingh]

Hy

Have to clarify :

"That is called put call parity, but holds only for European option"

AND AMERICAN STYLE OPTIONS, if they are not exercised early.

Take care

DanPickUp

Agreed. But you are pricing the option today, so how can you guarantee that its not going to exercise early. If there is good amount of dividend payment it can exercise early.

 

[DanPickUp]

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[DanPickUp]

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[pkusingh]

Hy buddy
If you are the buyer or seller of an option, you are then the one which give the order to sell or buy them back before option expiry.
DanPickUp

lesson learned.

If you trade after this criteria, I recommend you to use some kind of option analyze software.
DanPickUp

Which criteria?? put -call parity??

I do not know the free stuff in India, but some of your friends surely do.

You then have to give in the prices you bought and sold this options and you then can manage the trade by controlling your analyze picture.

The problems with options is the way they are. They are like chewing gum.

I never look option price... I trade implied vol..I am not good on that.

A future is a future. But an options give so many possibility and acts in different ways. To be come a master with them is quit difficult.
DanPickUp

True.

Hope my answer helped you a little bit

What exactly you answered?

 

[DanPickUp]

Hy

You wrote about your self ; " I am not good on that."

Yes, I agree 100% with that.

 

[sumitdasjoshi]

hello aw10 i have sold this things on 26/03/2010
s 5000 ce =-90.00
s 4800pe = -99.60
total at 189.60
end of the day premium was 158
well i cant find where my break evean point is 5189
and lower break even point is 4611 is this callculation is right or did i misse something.and one more question if on expirey it will close 4800- 5000 than i will get hole premium or not.