Queries regarding F & O basic terminology

[beginner_av]

as for ur fut - opt combi, NO NO and NO as it may fall to 400, u lose, u square of , but ur call will still have say Rs 8 time value, so u make only Rs 6, instead of 14. Now what do u do? Hold the naked call. to make the remainng Rs 8 hoping that Tisco expires below 520?..what if Mittal offers to buy TISCO and it jumps to 590 in three days?
GOLDEN RULE
IF U ARE CLOSING ONE SIDE OF A SPREAD, CLOSE THE OTHER AS WELL, OR U MAY BECOME A BEGGAR

 

[keertimannan]

hi all,

please guide another novice-

what happens if i sell futures of xyz and simultaneously buy 2 call options of xyz?

1 xyz goes down on expiry ---profit on futures( theoratically unlimited )but loss of 2 premiums( fixed loss) --- amount made /lost depends on the difference of the two.

2.xyz does not move significantly-----loss of 2 premiums

3.xyz goes up--- loss on the sold futures but profit on the 2 calls----1 call option cancels the loss on futures while the other call option makes me money.


am i right ??????

 

[beginner_av]

again theoetically right, practically difficult. Say u buy tisco 520CA. u know how much u'll spend? May be 40 Rs (2 contracts of calls * 20). Now sir do u expect tisco to fall greater than rs 40 in a month unless theres a mkt crash? then how'll u ever recover ur call expenses? and yes on the reverse, if tisco closes even at 535, u lose rs 5 on 2 calls and rs 15 (provided u sold fut Tisco at Rs 520). See u dont recover anything, but make huge losses.

I'll explain the theory and strategy in details in a couple of days...so keep watching.

 

[keertimannan]

thanks -----will wait for further details.

 

[beginner_av]

the whole game is about volatility. when volti is high, call and put prices are high, and vice versa. call writers are smart people and they take volatility into account when they write calls or puts. remember volti indicates movement of the price in ANY direction and is probailistic only. When large movement is probable, volti becomes high and vice versa. Hence when u buy a call, already some of the movement is priced in. So when u buy two calls, getting money over and above is improbable.
ACtually there's no free lunch on the street. You want to take a position where you want to make money irrespective of the direction of movement. But what if price does not move (that happens most of the time...now u r in volatile times, so u may not realise).
Still if u feel that theres a large movement thats possible in the stock, but u dont know the direction, there are two strategies, straddle and strangle. See if u can find out for yourself...u'll learn lot more in the process of searching urself.

 

[keertimannan]

hi,

what happens if i buy future of xyz @ 400 +buy put of xyz @ 390 (with the same expiry date)

i get the reasoning that i may not make any money or even lose money if the stock does not move beyond 400 + (premium paid on the upside + brokerage) and 390-(10+brokerage) on the downside.(approx range 380 to 410)

is that all to it or am i missing something????? what i want to know is whether i have a fair grasp of F&O workings or am i hopelessly out of depth????

 

[vince]

If Rs 10 is the premium, you've got it figured right.

 

[beginner_av]

yes u r right, but if u want to be smart money..its all this plus the cost of funds employed for the holding period

 

[keertimannan]

thanks and keep up the good work of posting expert strategies and advise to guide newcomers to F&O.

 

[keertimannan]

hi,
some more queries----

*my broker charges 25% margin irrespective of whether i am dealing in stock options or stock futures, is that the norm? i do not have anybody to guide me amongst my family or friends as they stay out of the stock market,but from reading books i gather that margin for futures is significantly less than that for options,so is my broker charging too much margin?

*i have bought ITC NOV futures at 189 rs,so what happens in OCT expiry? do i have to carry forward my position by telling the broker or will it get done automatically?

* what does carry forward position in futures mean? suppose at nov expiry ITC futures is trading at premium of 6 rupees---does it mean that i now have to pay 6 rupees /share extra to keep my position intact? what if it is trading at a discount of 6 rupees? do i pocket it?

*in the same vein, what is meant by negligible cost of carry?

*to square off my position i can SEll nov ITC futures anytime i want,right?

*Experts in F&O,please tell me what you think of owning futures instead of stock--according to my thinking---

#if i buy ITC1125 shares at 190 it will cost me approx 2 lacs14 thousand Rs,with the advantage fo dividends and 0% long term capital appreciation tax but with the risk of capital erosion in case of a market fall.

#if i buy ITC futures at190,it will cost me 50,000 Rs (Margin that i have actually paid) . If ITC goes up , i get the profit on 1125 shares while i have actually paid capital on only 250 shares (250 X 190 = 47,500).

#if ITC goes down , i need to have the capital to take care of the mark to market requirements---ideally it should be equal to the exposure ie 2 lacs but practically even if the market nose dives it is difficult to imagine ITC losing 50% of its share value--so 75,000-100,000 rs should be enough to keep in reserve in short term fixed deposits and another 1 lac in 3-5 yr FD which can be broken if required.

*what is the effect on futures in case of a large dividend payout?

*do you think keeping futures position intact for months or years in lieu of actually holding the shares is wise given the loss of dividends and 0% long term capital appreciation tax and need to carry forward position at each expiry with resulting increased brokerage costs.

* can brokerage be reduced by taking positions every alternate month--for ex: in oct take nov futures and in the end of nov take jan futures and so on?does it make a difference ?

* my broker asks me to pay margin even on a call option sold against the futures (covered call),inspite of my showing him the book by ashwani gujral(how to make money trading derivatives) and R Mahajan(F&O--introduction to equity derivatives) which state explicitly that no margin is required to be paid on the sale of a call option in case of covered call( in which either shares or futures are owned ). I asked indiabulls but they also said the same---do you know a broker who does not ask for margin on a covered call? what do i do?

------hoping to get some enlightenment from experts

thanks