Other than speculation,
options can also be bought as a means to insure potential losses for an
existing position in the underlying. To hedge a long underlying position, a protective put can be purchased.
Similarly, to protect a short underlying position, a protective call strategy can be
Covered Call Strategy
In-the-money covered call
optionsare sold when the investor has a neutral to slightly bearish
outlook towards the underlying security as their higher premiums provide
greater downside protection.
Covered Call Strategy
This is a covered call strategy where
the moderately bullish investor sellsout-of-the-money calls against a holding of the underlying shares. The OTM covered
call is a popular strategy as the investor gets to collect premium while being
able to enjoy capital gains (albeit limited) if the underlying stock rallies.
Out-of-the-money optionsare cheaper to buy thanin-the-money optionsbut they are also more likely to expire worthless.
For call options, this means that the
higher the strike price, the cheaper the option. Similarly, put options with
lower strike prices are therefore less expensive to purchase.
However, the size of the premium alone
does not tell us the whole story. In fact,at-the-money optionscan be considered the most expensive even though their
premiums are lower than in-the-money options. This is because theirtime valueis highest and time value is the part of the premium that
will waste away as the expiration date approaches.
In a week's time from
now, Union Budget 2015-16 would be unveiled by Finance Minister, Arun
Jaitley. The Union Budget is being unveiled on Saturday and while there
were apprehensions on whether there would be trading on Saturday, the NSE and
the BSE have announced that there would be trading on this day.
It's going to be an
extremely volatile session on the day of the Budget, simply because there is so
much expectations this time around. If this is not a dream budget, chances are
there could be huge selling pressure in the markets.
are a few shares to buy ahead of Union Budget 2015-16.
When looking at
an option chain, you see all the data for an underlying asset and its related
options. Between the various sections – the underlying, the call and put
options, and the different expiration months – there are fundamental
relationships that underlie their pricing.
relationships get out of line, an arbitrage opportunity exists—buying an
option(s) and selling the related option(s) for a (near) risk-free
profit. To illustrate these relationships we will use arbitrage
strategies, and we will begin by discussing synthetics, which form the basis
for all the different arbitrage strategies.
There can be up
to three different parts to any potential option strategy: The underlying
asset; the Call options; and the Put options. Most arbitrage strategies
use the concept of synthetics, and they are a large part of the strategies we
use here. A synthetic strategy is one where you combine any two parts
(calls, puts and/or the underlying) to create a position that looks like the
For example, if
you buy both the stock and a put option, you will make money if the market goes
up, but your loss is limited if the market falls. That's exactly the same
risk/reward you would get if you bought a call option – you make money if the
market goes up but your loss is limited to the premium paid if the market
falls. Buying the stock and buying a put is therefore called a synthetic
call. In terms of risk and reward, it is exactly the same thing!
synthetic relationships may seem a little confusing, but with a little practice
you will see how easy it is to understand. An important rule to keep in
mind is that the strikes and months of the calls and puts must be identical.
For synthetics that involve both the stock and options, the number of shares
represented by the options must be equal to the number of shares of
stock. The table below lists the basic synthetic positions:
Bullish strategies in options trading are employed when the options trader expects the
underlying stock price to move upwards. It is necessary to assess how high the
stock price can go and the time frame in which the rally will occur in order to select
the optimum trading strategy. Very BullishThe most bullish of options trading strategies is the simple call buying
strategy used by most novice options traders.
Moderately Bullish In most cases, stocks seldom go up by leaps and bounds. Moderately bullish options trader usually
set a target price for the bull run and utilize bull spreads
to reduce risk. While maximum profit is capped for these strategies, they usually
cost less to employ. Mildly Bullish
Mildly bullish trading strategies are options strategies that make money as long as the
underlying stock price do not go down on options expiration date. These strategies
usually provide a small downside protection as well.