Picking up nickels in front of steamroller!!

[samip2u]

Possible step/s...

1. sell future if believe further downside.
1a. sell call in addition to future if I am believe that the stock would not recover soon.
2. buy next step put if I believe further downside
3. buy ATM call if I believe a bounce back in stock

There can be more strategies , and that too can go wrong as well !!

The above mentioned strategies are reduce the potential overall loss...
but no way gonna limit the potential loss in option writing due to the unexpected swing in the underline ..

As Liquidity will be an issue.. and even at loss... it would be difficult to square off the position... Think abt a situation when... the option u have writen went in to ITM for the buyer.. and the buyer prefers to execute the RIGHT and you being the obligator... bound to oblige.... so then, the option wiriter is completed screwed !!!.....for instance if RNRL option expires at spot 45 ( with strike 50 ) executed, option writer need to bear the loss of amt. 5 * 3500 = 17500 Rs,...!!!!

Isn't it way to risky.. can we really leave it to fate... that this kinda swing is rare... i can understand, in reality... this inda swiing is rare... but what IF... i mean.. trading is abt to manage ur risks.... isn't it ?

 

[jvblogger]

The above mentioned strategies are reduce the potential overall loss...
but no way gonna limit the potential loss in option writing due to the unexpected swing in the underline ..

As Liquidity will be an issue.. and even at loss... it would be difficult to square off the position... Think abt a situation when... the option u have writen went in to ITM for the buyer.. and the buyer prefers to execute the RIGHT and you being the obligator... bound to oblige.... so then, the option wiriter is completed screwed !!!.....for instance if RNRL option expires at spot 45 ( with strike 50 ) executed, option writer need to bear the loss of amt. 5 * 3500 = 17500 Rs,...!!!!

Isn't it way to risky.. can we really leave it to fate... that this kinda swing is rare... i can understand, in reality... this inda swiing is rare... but what IF... i mean.. trading is abt to manage ur risks.... isn't it ?

Yes it is risky!!(Link)

We had assumed many things to create a worst scenario, but in the reality is mostly less fearful then we imagine. We had guessed that with one sudden wild swing from 70 to 55, the premium of RNRL 50 PUT would be Rs.10-00, which is not possible.

After your query I plotted RNRL and NIFTY VIX for date range of 01-01-2006 to 05-01-2009.

I found that RNRL has moved more than 20% in one day on 10 occasions since 01-01-2006. And those occasions are co-related during the period of high VIX. As the VIX has lowered so does the volatility in RNRL.

However, that does not mean that RNRL cannot jump 20% in one day when VIX is low. But the probability of such jump very less likely.

 

[aditya14]

After your query I plotted RNRL and NIFTY VIX for date range of 01-01-2006 to 05-01-2009.

I found that RNRL has moved more than 20% in one day on 10 occasions since 01-01-2006. And those occasions are co-related during the period of high VIX. As the VIX has lowered so does the volatility in RNRL.

However, that does not mean that RNRL cannot jump 20% in one day when VIX is low. But the probability of such jump very less likely.

Why are you correlating NIFTY VIX and RNRL vix?
do u think that RNRL moves in same range as nifty?

This is a flawed assumption.

 

[jvblogger]

Why are you correlating NIFTY VIX and RNRL vix?
do u think that RNRL moves in same range as nifty?

This is a flawed assumption.

Thanks for your views.

No I do not suggest that RNRL moves in same range as NIFTY. When Samip pointed out that what if RNRL (or any stock option) moves significantly, causing heavy loss. That made me to think about the daily volatility %. So I plotted RNRL daily volatility in %. When I plotted only RNRL daily data, it showed some higher spikes in particular period then other. So I wondered if such spikes are related with overall market volatility. Thereafter I plotted NIFTY VIX with RNRL volatility. And I found, not assumed, that higher volatility in RNRL is broadly co-related with NIFTY VIX.

Another thing, perhaps you might have noticed, that I plotted NIFTY VIX which is implied volatility, a future prospect, with historic volatility of RNRL. The back testing showed that historic volatility largely moved in relation with the implied volatility.

Thanks again.

 

[jvblogger]

RNRL 90 CALL @ .90
RNRL 60 PUT @ 1.00

DLF CALL 420@ 3.60
DLF PUT 340 @ 7.30

Both puts seem somewhat risky

I picked up some more nickels, in addition to above..

NIFTY CALL 5500 @ 18.50
NIFTY PUT 4900 @ 18.00
(2 lots each)


DLF 420 call is giving some jolts ...

 

[samip2u]

I picked up some more nickels, in addition to above..

NIFTY CALL 5500 @ 18.50
NIFTY PUT 4900 @ 18.00
(2 lots each)


DLF 420 call is giving some jolts ...

Jv... normally how much margin do u need for the trading. on an avg for at a time..... u have 2 lots of nifty.. something like 50K is blocked....for stock options also... a good amt ned to be blocked as margin...

so total margin on 3-4 stock options... and maybe two lots of nifty options writing..... shd be ard... 100k+ ?

Actually.. was trying to analyse... if i keep that big amt in FD.. shd be getting decent interest... so wanted get the clearer picture... thought. if u get 9-10K... on 100K... in a month.. nothing like it....


i think u will sail thr RNRL easily... well DLF... shd have resistance above 400, but then 420 call shd be giving some jolts

btw i also have the nifty call/put of the same strike... but with 1 lot

 

[jvblogger]

One lot of NIFTY requires margin around 17-18000. I have already attached a excel file in earlier post showing indicative span margin for each stock. SPAN margin changes everyday according to the close.

I too started option selling as to get at least return on my investment if they were invested in FD.

Today's dip in DLF relived my tension little bit.

 

[jvblogger]

RNRL 90 CALL @ .90
RNRL 60 PUT @ 1.00

DLF CALL 420@ 3.60
DLF PUT 340 @ 7.30

NIFTY CALL 5500 @ 18.50
NIFTY PUT 4900 @ 18.00

In addition to above, sold ...

TATAMOTORS CALL 860 @ 4.40
TATAMOTORS PUT 720 @ 6.00

 

[jvblogger]

THE AFTERMATH

What a volatility in last four days! :clap:

Yesterday most of my options were at the verge of wipe out, but today most of them recovered and I squared off some of them.

For January'10 Series I had sold following options

RNRL 90 CALL @ .90
RNRL 60 PUT @ 1.00

RNRL options went without much hiccups, today in late trade it was near 62-63 but steered clear.

DLF CALL 420@ 3.60
DLF PUT 340 @ 7.30

It was DLF put 340 which collapsed first and yesterday it went in the money @ 334 and squared it in Rs.8-00, which left me with Rs. 2.90, out of Rs.10.90 of total premium collected from both the side.

NIFTY CALL 5500 @ 18.50
NIFTY PUT 4900 @ 18.00

NIFTY 4900 put also gave some trouble and went to Rs. 70-00 yesterday when I was away from the computer, and fortunately in today's bounce back I was able to square in Rs.25-00, but left me some nickles of Rs.11-00.

TATAMOTORS CALL 860 @ 4.40
TATAMOTORS PUT 720 @ 6.00

TATA MOTORS put, also went in the money today, and I squared of the put in Rs.4.10, but left me with some Rs.6-30.

I was left with some 50% of total premium collected at the beginning. Which is much better then my anticipated fear for "unlimited loss". I believe I need to face more volatility to test my strategy further.

 

[jvblogger]

The RBI-Sebi Standing Technical Committee on exchange traded currency futures in India is currently deliberating on the various parameters for introducing currency options trading. Options in currency derivatives will be introduced within next three months, said a top Sebi official. Market participants feel new products such as options will signal further maturing of Indian forex markets and bring them on par with other global markets.

Options trading in currency derivatives to begin by May - The Financial Express 31-01-2010


Options in currencies will allow to diversify option-selling which will be good risk management method.