Trading Strategy: Buying Call Options to Hedge a Short Sale

One of the riskiest investment strategies in the financial world involves selling stock short. This involves borrowing stock from your broker and selling it. If the stock's market price drops, you can buy it back at the lower price, pay back your broker and pocket the difference. Problems arise if the stock price doesn't co-operate and instead skyrockets. You can hedge your position by buying protective call options.

Call Options

A call option gives the option holder the right, but not the obligation, to purchase the underlying security at a fixed price, called the strike price, for a set period. If the option isn't exercised before it reaches its expiration date, it becomes worthless and ceases to exist. Call options are traded on major investment exchanges in much the same way that stocks are traded. While owning a call option doesn't give you ownership of the underlying stock, it does give you control over that stock for as long as the option is in force.

COMPARISON BETWEEN DERIVATIVE & EQUITY

In derivatives trading, traders can hold long or short positions for more than 1 day whereas in equity trading, short sell trading are supposed to square off before the market closing on the same day. Traders must not carry forward their short positions in any way, denying which results in penalty around 20% in auction market Apart, these tips are divided into indexes and stocks. As said in our previous article, virtual scrips like nifty, bank nifty, cnx IT ect., are called as index stocks where as companies which exist in real are said to be stock scripts.

RCOM STRAP STRATEGY UPDATE

RCOM OPTION STRAP STRATEGY ROCKS!!!!!!!!!!

 HOPE YOU HAVE BOOKED PROFIT IN  RCOM 130 AUG PUT @ 8 (GIVEN @2.8) contd..to hold  the call.

PROFIT FROM RCOM 130 PUT=(8-2.8)*2000=10400

RCOM STRAP STRATEGY UPDATE

RCOM STRAP STRATEGY :
BOOK PROFIT IN RCOM 130 AUG PUT @ 7.8- 8 (GIVEN @2.8)

OPTIONS COMBINATIONS

A combination is an option trading strategy that involves the purchase and/or sale of both call and put options on the same underlying asset.

Call & Put Buying Combinations

Straddle

The straddle is an unlimited profit, limited risk option trading strategy that is employed when the options trader believes that the price of the underlying asset will make a strong move in either direction in the near future. It can be constructed by buying an equal number of money call and put options with the same expiration date.

Strangle

Like the straddle, the strangle is also a strategy that has limited risk and unlimited profit potential. The difference between the two strategies is that out-of-the-money options are purchased to construct the strangle, lowering the cost to establish the position but at the same time, a much larger move in the price of the underlying is required for the strategy to be profitable.

RCOM OPTION STRAP STRATEGY

BUY  ONE  LOT RCOM 130 AUG PUT @2.8

BUY TWO LOTS RCOM 150 AUG CALL @2.3

COST =5.1

TOTAL RISK  = 15800

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=155.1

LOWER BREAK GIVEN POINT=124.9
 For Pay off table click on read more:

TWO WAYS TO SELL AN OPTION

In contrast to buying options, selling stock options does come with an obligation - the obligation to sell the underlying equity to a buyer if that buyer decides to exercise the option and you are "assigned" the exercise obligation. "Selling" options is often referred to as "writing" options.

When you sell (or "write") a Call - you are selling a buyer the right to purchase stock from you at a specified strike price for a specified period of time, regardless of how high the market price of the stock may climb.

Covered Calls

One of the most popular call writing strategies is known as a covered call. In a covered call, you are selling the right to buy an equity that you own. If a buyer decides to exercise his or her option to buy the underlying equity, you are obligated to sell to them at the strike price - whether the strike price is higher or lower than your original cost of the equity. Sometimes an investor may buy an equity and simultaneously sell (or write) a call on the equity. This is referred to as a "buy-write."

THREE WAYS TO BUY AN OPTION

When you buy equity options you really have made no commitment to buy the underlying equity. Your options are open. Here are three ways to buy options with examples that demonstrate when each method might be appropriate:

Hold until maturity....., then trade:-

This means that you hold onto your options contracts until the end of the contract period, prior to expiration, and then exercise the option at the strike price.

When would you want to do this? Suppose you were to buy a Call option at a strike price of $25, and the market price of the stock advances continuously, moving to $35 at the end of the option contract period. Since the underlying stock price has gone up to $35, you can now exercise your Call option at the strike price of $25 and benefit from a profit of $10 per share ($1,000) before subtracting the cost of the premium and commissions.

Trade before the expiration date :-

You exercise your option at some point before the expiration date.

For example: You buy the same Call option with a strike price of $25, and the price of the underlying stock is fluctuating above and below your strike price. After a few weeks the stock rises to $31 and you don’t think it will go much higher - in fact it just might drop again. You exercise your Call option immediately at the strike price of $25 and benefit from a profit of $6 a share ($600) before subtracting the cost of the premium and commissions.

Let the option expire :-

You don’t trade the option and the contract expires.

Another example: You buy the same Call option with a strike price of $25, and the underlying stock price just sits there or it keeps sinking. You do nothing. At expiration, you will have no profit and the option will expire worthless. Your loss is limited to the premium you paid for the option and commissions.

Again, in each of the above examples, you will have paid a premium for the option itself. The cost of the premium and any brokerage fees you paid will reduce your profit. The good news is that, as a buyer of options, the premium and commissions are your only risk. So in the third example, although you did not earn a profit, your loss was limited no matter how far the stock price fell.

SPOT OPTION ADVANTAGES AND DISADVANTAGES

Initially used in Europe as another way to trade currency options, single-payment options trading (SPOT) options have gained acceptance in other markets as well. Investors who are learning to invest might consider using them, as they offer another way to possibly generate profit and lower risk.
What are SPOT Options?
SPOT options allow an investor to set the conditions that must be met to receive a desired payout. Setting up this type of option involves three steps:

1. The investor defines a trading scenario that, according to his/her analysis, has the best prospects, including the risk-reward tradeoff.
2. The broker determines the probability the conditions will be met and proposes an appropriate premium. The price of the option or the premium quoted by the broker will depend on the likelihood of the scenario occurring.
3. The investor can agree to either pay the premium and then buy the option or turn it down. Normally, the price of the option or premium represents a percentage of thatpayout.

SPOT options are vanilla put and call options whose value is set by the conditional scenario, not just the price and the expiration date.

The Advantages and Disadvantages
Like most investing techniques, there are advantages when using SPOT options:

• While a bit different from normal options, SPOT options are easy to trade. With a normal option you might not be able to close out the position, since no one is willing to take the opposite side. With SPOT options, this is never a problem, since there is never a need to close out the position - it is a one-sided trade.
• SPOT options give you the opportunity to create different scenarios that allow choosing exactly what you believe will happen in the market. In fact, investors who use SPOT options define the specifics of the trade.
• With SPOT options, the downside risk is limited to the premium paid.
• The option scenario defines the reward, so it is known before entering the trade. Before committing to the trade, you know the risk-reward tradeoff....

BINARY OPTION STRATEGIES & MANAGEMENT

As an entertaining and interesting trading method, binary option trading is becoming popular among the investors day by day.

A lot of binary option strategies are available which the traders use in order to succeed in trade. The basic concepts of all binary option strategies are the same although different investors follow different strategies. As opposed to other trades, binary option trading offers only two probable outcomes, loss or gain.

In binary option trading the turnover is fast which is yielded by calls and puts. Because of this if a good binary option strategy is used, traders would see most of their investments bringing high returns.

There are some basic strategies followed by all traders concerning the binary option strategy guide. The first one is the pairing up of an “in the money” call and money put. That’s why you can still earn money if the spot price is between the two prices at the expiration.

Another useful strategy in binary option trading is the pairing the put with a call into a hedge and double position. This binary option strategy helps to make very high profits.

Binary option betting strategy is another very popular strategy. In this strategy an investor uses a pull or call option if an unexpected move occurs on the market. This strategy is based on the fact that people put positions on indicators which have large scale impacts on the market prices.