WHAT IS CALL OPTION

CALL OPTION

If you think a stock price is going to go up, then there are 3 trades that you can make to profit from a rising stock price: 

1. you can buy the stock
2. you can buy call options on the stock, or
3. you can write put options on the stock

Buying stock need huge capital investment plus your total capital is @ risk

Writing put option also need huge margin and risk associated with it is unlimited

Buying call option give u unlimited profit upside and limited risk downside.

Only enemy of call option is time so u should book your profits as early as possible.

Let’s understand using an example. Suppose, today’s date is 18-APR-2012 and you buy a RELIANCE CALL option (strike=800, EXPIRY  MAY 31) @ Rs. 20  per contract when RELIANCE stock was getting traded at 760. Let’s see what happens after options expiration.

Case I : Reliance stock price greater than the strike price. Reliance stock trading at 840on expiry day cut-off time

Net profit = (current price – strike price) - premium = (840–800 ) -20= Rs. 20 per contract

Case II : Reliance stock price less than strike price (800) on expiry day cut-off time

Net loss = Premium paid = Rs. 20 per contract

So when you buy a CALL option you have unlimited profit potential but limited risk or downside.

OPTION PUT CALL RATIO

PUT CALL RATIO

 Put Call Ratio is one of the most common technical indicators used by investors and traders. Why? Well, it is designed to quantify investor sentiment, which many market technicians believe is the primary factor in market turns and trends.

It is calculated using the activity of options buyers, who are focused on anticipating moves within a certain time period. The most common method of measuring the Put Call Ratio is to divide the number of put contracts by the number of call contracts traded during a set time period. Investors buying puts are anticipating lower prices, while call buyers expect the market to rally.

This ratio tells us about the level of bullishness or bearishness in the market. PC ratio can be used in two ways, either the direct way or the contrarian way. For the direct way, you simply follow the ratio and flow with the tide, and for the contrarian way when bullishness is high then downside risk is also high so you take a contrarian view and sell or vice versa. It can act as a preventive measure against sentiments which often lead to buying when the market is high and selling when it is low.

PC ratio goes well with overbought and over sold indicators. A low PC ratio, generally below one, reflects a bullish sentiment and vice versa. It can be based either on open interest or volumes. PC ratio on volumes indicates the sentiment on that particular day while PC ratio on open interest (PCR-OI) gives a carry forward view.

Open interest is the total number of options and/or futures contracts that have not yet been exercised, expired or fulfilled by delivery on a particular day. PCR-OI is mainly used to gauge the sentiment for the coming trading sessions.

Theoretically, if one buys a put option then he is bearish on the underlying and one who buys a call option is bullish on the same. This theory works very well in matured markets where options turnover as well as open interest is significantly high. So there, one can form a conclusion that if PCR-OI is high then market participants are expecting underlying to correct and vice-versa. However, PCR-OI is not seen in isolation, it is seen with price movement. For example, if underlying after moving up has become range-bound and then you see that PCR-OI of that underlying is increasing then one may say that participants are expecting correction and vice-versa.

BOOK PROFIT IN DLF SHORT STRANGLE

BOOK PROFIT IN DLF SHORT STRANGLE STRATEGY

BUY DLF 220 CALL @ 2(SOLD @ 5.70)

BUY DLF 200 PUT @ 4.5(SOLD @ 4.70)

NET PROFIT 10400-6500= 3900

STRATEGY GIVEN ON 3 APR 2012- http://optioncallputtradingtips.blogspot.in/2012/04/dlf-short-strangle-strategy.html

OPTION VALUATION

OPTION CALL PUT VALUATION

Understanding Option pricing and valuation is very necessary before u start trading in this highly profitable segment .

If you just blindly start trading stock options without having at least a basic understanding of stock option valuation and why options behave the way they do, then you're going to be in trouble and possibly lose a great deal of money.

The value of an option is determined by its chance to be exercised with profit on the expiry day. This consists of two parts: the real value and the time value. The real value is the value that is possible to ‘touch’. A call option has a real value if the underlying stock’s price exceeds the option’s strike price. For put options it is the other way around, in that they have real value if the strike price instead exceeds the value of the stock. Conversely the time value is the value of the possibility that good news will occur during the time to maturity in order for an option to have a real value on the expiry day. Time value changes during the maturity period and will always be zero on the expiry day. Options that have a real value are said to be ‘in the money’ and are called plus options by professionals, while options that completely miss real value are ‘out-of-the-money’ and are referred to as minus options. Options where the strike price and stock price corresponds are ‘at-the-money’ and are called pari options.

The value of the option can be estimated with a mathematical formula named Black & Scholes after its inventors. In the formula the price is calculated as a function of the underlying stock value, the strike price, the time to maturity and the level of the risk free interest rate, among others. All terms in the equation can be determined relatively easy except one: the stock’s volatility. The risk measure that is interesting when one deals with options is the so called ‘implied volatility’, which contains the premium that the market has set on the option. Contrary to historical volatility, implied volatility measures the market’s expectations on the future changes in the stock price. This is crucial, as it is when an investor has a different opinion to the general market about the future risk of a stock that it becomes possible to enter and make money from an option, since its premium then will be different than what it ‘should’ be. 

There are a large number of strategies that one can use in order to profit from the possibilities of options. Learning the differences and advantages between different options is critical to success, as options can appear superficially similar. It is seldom enough just to look at the option’s premium and the strike price. Real professionals also look at how sensitive the options are for the market climate. By using Black & Scholes’ formula one can derive several important sensitivity measures – commonly mentioned as ‘the Greeks’ since they have been provided with Greek letters – that can clearly tell how an option will react from different market conditions.

OPTION CHAIN

UNDERSTANDING NIFTY OPTION 


CHAIN


Many traders want to trade in options, but they find it difficult to chose between various strike price. Even if you are clear about whether you want to buy a call or put it seems difficult to select which one. Here we attempt to explain Option chain so that you can decide upon strike price.
To trade in options, we need to have following information with us
 a)    Underlying Security
b)    Option Type – CALL or PUT
c)     Contract Expiry
d)    Strike price
 Once you have all above information, you have unique identifier of the option contract that you can buy or sell in the market.
 On NSE homepage, there is link called Option Chain.  Option chain lists the available option contracts of an underlying security that are currently traded in the market.
The information is presented in tabular form as given below. If you are new to options trading then you will be confused with the amount of information present here.




Let’s look the pieces of this jig-saw puzzle in parts and understand them.
 The table below can be logically divided in two parts. Left part of table has information related to CALL options and right part of table has information about PUT options.
In the center, we have various strike prices for option contract arranged in ascending order.
 Expiry Date – This is the option contract’s expiry date. Various contract expiry that are traded in the market currently are listed here.
Open Interest - Number of open positions for a particular strike price.
LTP = Last traded price
Net Change – % change in the price at which a particular option is traded in market last, with respect to the closing price of previous trading day.
Volume – Number of contracts traded today
Bid Quantity – Quantity given in the last open buy order for this particular strike price.
Bid Price – Price given in the last open buy order for this particular strike price.
Offer Price – Price given in the last open Sell order for this particular strike price.
Offer Quantity – Quantity given in the last open Sell order for this particular strike price.
In other words, bid price indicate the price that buyers is wiling to pay to buy the option contract, and Offer price  indicates the price at which seller is willing to sell.
You can click on Quote link on a particular row to get the more details.
You might notice that part of the table has cells with coloured background. These cells indicate that those particular strikes are In-The-Money. The cells with white background are for Out-of The-Money strikes.

DLF SHORT STRANGLE STRATEGY

OPTION CALL PUT STRATEGY

Option calls premium have time value in it. Tomorrows trading session is followed by very Long weekend. To en cash this situation we recommend Short Strangle strategy in DLF as it is trading around its average Price.

DLF SHORT STRANGLE STRATEGY

LEG1: SELL DLF 200 PUT@5.70

LEG2: SELL DLF 220 CALL@4.70

CREDIT RECD =(5.70+4.70)*1000=10400

OUT LOOK  5-7 Days

Continue to Hold With SL of 3 Rs

Low Volatility Option Strategy

Low Volatility Options Strategies

Market is in very narrow range. April is generally low volatility month. In such scenario Long Option Traders tend to loose money day by day. Here we present some option strategies for this type of lack luster market.

Low volatility options trading strategies you can use:

Short Puts and Calls – This is the main strategy we use here and by far the most profitable. It’s cheap and you don’t have to enter multiple options making it an easy trade for beginners. With short options you can move your strike price far from the current market forcing the market to make dramatic moves in short time period. You also have positive time decay since you collect the premium up-front and let the option expire worthless at expiration.




   Short Strangle – A combination of short Puts and short Calls. Again a great risk reward type trade because you collect an up-front premium and let the options expire worthless in a flat market.

Long Butterfly Spread – Very complicated and complex option trade. No recommended for beginners! This is a great strategy with limited risk but you have to be dead on in your analysis of where the stock will close at expiration. Sure the risk is capped but if your not right at expiration there’s a 100% chance you will lose money.

BOOK PROFIT IN NIFTY SHORT STRANGLE

BOOK PROFIT IN NIFTY SHORT STRANGLE

NIFTY SHORT STRANGLE BOOK PROFIT

5100 PUT BUY @ 41(SOLD @ 64)

5500 CALL BUY @ 41(SOLD @ 64)

TOTAL PROFIT =2300 PER LOT
http://www.optioncallputtradingtips.blogspot.in/2012/03/nifty-short-strangle-strategy.html

OPTION CALL PUT TRADING

KEYS TO SUCCESS IN OPTION CALL PUT TRADING

1) Don’t Average There is a reason for the expression that ” the trend is your friend.”  Don’t fight it and most of all Don’t assume that it will turn itself around. Averaging down into a losing trade is a sure way to lose your money.

2) Trade when the market goes up and when it goes down. Most traders know how to buy calls. They know how an when to buy  when they believe that the market will go up. But there is an equal amount of money to be made when it goes down. You have to be comfortable investing in both calls and puts. Again look at the trend and if it reverses get out of the trade.

3) Trade logically. Fear based trading is a sure way to lose money. Fear creates paralysis. It keeps you from pulling the trigger and getting out of a trade.

4)Trend: The objective of successful options strategies is to create profit. It is opposite of what many believe. You are not there to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower. Look at the trend.

5) Sell markets that show the greatest weakness; buy markets that show the greatest strength. Again look at the trend. You are not here just to buy into strong markets. You are here to make a profit either way.

6) Trading is not compulsory:You do not have to be in a trade all the time. There are times when the markets are flat or in a sideways trend. This is not the time to enter a trade. Stay out of the market!

7) No one can predict the market. Your options strategies should always include entry and exit points. Have a stop loss point in mind for each trade before you enter it. This is where most people get it wrong. You must be willing to put exit points in and stop losses as well.

You will win many trades but you will also lose some. No one is infallible. The main thing to remember is that you must trade long enough and minimize your losses enough to continue trading for those big winning trades.

NIFTY SHORT STRANGLE STRATEGY

OPTION CALL PUT STRATEGY

NIFTY has been trading around 5400 levels for quite some time. We expect it to continue for some more time.

We suggest SHORT STRANGLE STRATEGY for Monday

Nifty SHORT STRANGLE STRATEGY

LEG1: SELL NIFTY  APR 5100 PUT @ 64

LEG2: SELL NIFTY APR 5500 CALL @ 64

CREDIT RECD =(64+64)*50= 6400

OUTLOOK : 5-7 DAYS

CONTINUE TO HOLD WITH SL OF 50 POINTS EITHER SIDE.