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Thursday 7 June 2012
Wednesday 6 June 2012
FUTURE VS OPTION
Here we attempt to
explain basic difference between Future and Option Contracts
Premium
While you pay a fee called the "premium" when buying stock options, there are no premiums to be paid in a futures contract. The initial amount of money (known as "Initial Margin") paid when you buy a futures contract is a fraction of the price paid for the underlying stock. While wrinting options you receive premium.
Obligations
Buyers of stock options are not obligated to exercise the rights to buy the underlying stock at all while buyers of futures contracts or option writers are obligated settle difference with cash market and pay mark to mark daily.
Liability
Buyers of futures contracts and option writers are exposed to unlimited liability should prices move against them while buyers of stock options lose only the amount of money used to purchase those stock options.
Expiration
Buyers of futures contracts can carry forward their position by selling current month contract and buying next month or vice versa. Options expire worthless if the options are out of the money.
Versatility
Options trading is a lot more versatile than futures trading as the unique combination of call options and put options along with the premium on each contract made it possible for options strategies that profit in all directions. Apart from arbitraging, futures trading is basically single directional (you make money only when price moves in one direction).
By now, it should be clear that futures and stock options trading are two totally different things with their own trading characteristics. Futures trading is an important risk management and speculative technique while options trading has evolved to become a stand-alone strategic investment. Futures should never be made a replacement for stock options trading and stock options trading cannot replace Futures as well. Both trading instruments serves different purposes and should find their place in every well diversified portfolio.
Friday 1 June 2012
OPTION WRITING - 3 MISTAKES
As our markets are becoming mature, the
number of option writers is increasing. It is believed than generally 80 % of
option buyers loose money so what should we do..Option writing is other way
round..
Option writing or in other words option selling
means to sell option call and puts for a premium.
But while option selling can be a
powerful way to diversify into a non-correlated, non-directional strategy,
there is no free lunch. Writing options is one of those strategies that is easy
to understand but infinitely more difficult to master.
Experience shows, however, that not doing the wrong things will
have as much, if not more, an impact on your portfolio’s ultimate performance
than doing all of the right things. Therefore, we can learn a lot from the
errors of others. To that end, we’ll explore the three biggest mistakes that
option sellers make and, more importantly, discuss simple ways to avoid making
them.
Tuesday 29 May 2012
OPTION TRADING VS.STOCK CASH
Many traders now a day intend to shift from cash market to option market ,here is a comparison made to make it easy for them.
What is an option?
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.
An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity).
An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
Options vs. Stocks
Similarities:
1) Listed Options are securities, just like stocks.
2) Options trade like stocks, with buyers making bids and sellers making offers.
3) Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.Differences:
1) Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security
2) Options have expiration dates, while stocks do not.
3)There is not a fixed number of options, as there are with stock shares available.
4)Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights.
2) Options trade like stocks, with buyers making bids and sellers making offers.
3) Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.Differences:
1) Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security
2) Options have expiration dates, while stocks do not.
3)There is not a fixed number of options, as there are with stock shares available.
4)Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights.
for more insights u can read http://optioncallputtradingtips.blogspot.in/2012/05/call-option-put-option.html
Friday 25 May 2012
IFCI BULL CALL SPREAD OPTION STRATEGY
OPTION CALL PUT
STRATEGY
Here we present
you Bull call spread option trading strategy which is explained in detail in
our earlier post http://optioncallputtradingtips.blogspot.in/
This is very short term strategy with current expiry outlook
IFCI BULL CALL
SPREAD STRATEGY
LEG1: BUY IFCI 35 MAY CALL OPTION @.80
LEG2: SELL IFCI 37.5
MAY CALL OPTION @ .20
COST =4800
RISK PER LOT =
(.80-.20)*8000=4800
MAX RETURN 15200
Pay off table
Strike Price
|
Call Option Price
|
Strike Price
|
Call Option Price
|
Strike rate
|
Closing price
|
Lot size
|
Payoff
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
33.5
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
33.75
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
34
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
34.25
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
34.5
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
34.75
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
35
|
8000
|
-4800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
35.25
|
8000
|
-2800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
35.5
|
8000
|
-800
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
35.75
|
8000
|
1200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
36
|
8000
|
3200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
36.25
|
8000
|
5200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
36.5
|
8000
|
7200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
36.75
|
8000
|
9200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
37
|
8000
|
11200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
37.25
|
8000
|
13200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
37.5
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
37.75
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
38
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
38.25
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
38.5
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
38.75
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
39
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
39.25
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
39.5
|
8000
|
15200
|
35
|
0.8
|
37.5
|
0.2
|
0.25
|
39.75
|
8000
|
15200
|
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