LT BUTTERFLY STRATEGY FOR OCTOBER'2015

BUY 1 LOT LT 1400 CALL @ 101

 BUY 1 LOT LT 1500 CALL @ 43

SELL 2 LOTS LT 1450 CALL @69

Total risk=750

Upper break given point=1550

Lower break given point=1350

PAY OFF TABLE:

DLF STRANGLE STRATEGY

BUY DLF 140 CALL @3.3

BUY DLF 110 PUT @   2.7

COST=6

TOTAL RISK  = 12000

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=146

LOWER BREAK GIVEN POINT=104

Pay off table:

What Is Options Settlement In The First Place?

Settlement in options trading is the process where the terms of an options contract are resolved between the holder and the writer. In options trading, the holder is the one who owns an options contract and a writer is the person who sold the holder that options contract. Settlement  in call options contracts involve the holders of the options contracts paying the writers for the underlying asset at the strike price. Settlement in put options contracts involves the holder of the options contract selling the underlying asset to the writer at the strike price. After settlement, the options contract will cease to exist and all obligations between the holder and the writer would be resolved.

Settlement can happen under 2 circumstances; Voluntary exercise by the holder or automatic exercise upon expiration.
The holder of an American Style Option could choose to voluntarily exercise their options any time prior to expiration. Once that happens, settlement takes place between the holder and the writer and the options contract is resolved.

What the Option Market Can Tell You about that Stock You Love

For an investor who understands how to read the option market’s tea leaves, investing becomes like playing poker with an opponent who always holds his hand face up. This might seem too good to be true, but in fact, option prices contain within them the market’s consensus estimates for the future price of a stock. If you know where to look, you can easily decide if the market’s consensus price for a stock is near or far from your own idea of its value. Value investors who revel in finding differences between stock prices and intrinsic values will love what the option market can tell them about future expectations for stocks.

What Option Can Tell an Intelligent Investor?
Option pricing models are, first and foremost, statistical models of how stocks are likely to move in the future. The option pricing bit is almost an afterthought once the hard work of stock price forecasting is done. all option pricing models under the general term “Black-Scholes Model” or “BSM.” All subsequent models are basically tweaks of the BSM, in fact.) For all the mathematical complexity people associate with option pricing, it’s actually a pretty blunt tool. It’s based on a few, almost laughably simple assumptions:
1.       The market is “efficient”, so a stock’s market price represents its true value.
2.      Stock prices drift upward at the same rate as the rate of return for risk-free bonds.
3.      New positive and negative information relevant to the stock’s price comes in randomly, so the stock is as likely to go up as it is to go down.
4.      Stock returns follow a bell curve distribution.

 

HOW TO BUY OPTIONS

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Puts, calls, strike price, in-the-money, out-of-the-money — buying and selling stock options isn't just new territory for many investors, it's a whole new language.
Options are often seen as fast-moving, fast-money trades. Certainly options can be aggressive plays; they're volatile, levered and speculative. Options and other derivative securities have made fortunes and ruined them. Options are sharp tools, and you need to know how to use them without abusing them.
Stock options give you the right, but not the obligation, to buy or sell shares at a set dollar amount the "strike price" before a specific expiration date. When a "call" option hits its strike price, the stock can be called away. Conversely, with a "put" option the shares can be sold, or "put," to someone else. The value of puts and calls depends on the direction you think a stock or the market is heading. Stated simply, calls are bullish; puts are bearish.

What is the difference between options and futures?

The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.
Another key difference between options and futures is the size of the underlying position. Generally, the underlying position is much larger for futures contracts, and the obligation to buy or sell this certain amount at a given price makes futures more risky for the inexperienced investor.

The difference between futures and options as financial instruments depict different profit pictures for parties. The gain in the option trading can be obtained in certain different manners. On the contrary, the gain in the future trading is automatically linked to the daily fluctuations in the market. This is to say that the value of profit positions for investors is dependent upon the market position at the close of the trading every day. Therefore, every investor should have a prior knowledge of both futures and options before they enter the financial market operations.

1. A future is a contract which is governed by a pre-determined price for selling and buying at a future period. In options, there is the right to sell or purchase of underlying assets without any obligation.
2. A future trading has open risk. The risk in option is limited.
3. The size of the underlying stock is usually huge in future trading. Option trading is of normal size.
4. Futures need no advance payment. Options have the advance payment system of premiums

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Hedging

Hedging is the practice of purchasing and holding securities specifically to reduce portfolio risk. These securities are intended to move in a different direction than the remainder of the portfolio - for example, appreciating when other investments decline. A put option on a stock or index is the classic hedging instrument Options are a great way to hedge against your existing positions to decrease risk
When properly done, hedging significantly reduces the uncertainty and the amount of capital at risk in an investment, without significantly reducing the potential rate of return.
Hedging is what separates a professional from an amateur trader. Hedging is the reason why so many professionals are able to survive and profit from stock and option trading for decades
Downside Risk
The pricing of hedging instruments is related to the potential downside risk in the underlying security. As a rule, the more downside risk the purchaser of the hedge seeks to transfer to the seller, the more expensive the hedge will be.
Spread Hedging
Index investors are often more concerned with hedging against moderate price declines than severe declines, as these type of price drops are both very unpredictable and relatively common.
The Bottom Line
Hedging can be viewed as the transfer of unacceptable risk from a portfolio manager to an insurer. This makes the process a two-step approach

  

Option Delta

Delta is probably the first Greek an option trader learns and is focused on. The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative
In fact it can be a critical starting point when learning to trade options. A positive delta means the position will rise in value if the stock rises and drop in value of the stock declines. A negative delta means the opposite. The value of the position will rise if the stock declines and drop in value if the stock rises in price. Delta is one of four major risk measures used by option traders. Delta measures the degree to which an option is exposed to shifts in the price of the underlying asset. Delta tends to increase as you get closer to expiration for near or at-the-money options. Delta is not a constant

Call Options

Whenever you are long a call option, your delta will always be a positive number between 0 and When the underlying stock or futures contract increases in price, the value of your call option will also increase by the call options delta value.

Put Options

Put options have negative deltas, which will range between -1 and 0. When the underlying market price increases the value of your put option will decreases by the amount of the delta value. Conversely, when the price of the underlying asset decreases, the value of the put option will increase by the amount of the delta value.

 

 

How to Trade Nifty Options in Bearish Markets

Trading Nifty options in bearish market, in bearish people traders say they lose money but fact is bearish markets offer best money making opportunity as panic is higher in these markets so markets react fast. In case of bearish market you always look for selling opportunities or selling signals in technical indicator. We are talking about nifty option so we will be buying out of money put options if time of expiry is greater than 15 days, or else we will go with at the money or in the money put option. After selecting the type of put option now we will completely focus on the price action of the underlying i.e. nifty future and wait for pullback to buy that nifty put option. Target will be 50% of the total premium paid while purchasing put option and stop loss will be 25% of the total premium. In trading nifty options always remember a golden rule that you will never risk more than 10% of your total trading capital at any point of time.
Also it’s very dangerous to trade Nifty Options without proper guidance & knowhow. So, why don’t you leave the dangers to us and take yourself the most lucrative profit margin in the stock market.