Difference between options and futures

Option Markets

Options are standardized contracts that allow investors to trade an underlying asset at a specified price before a certain date (the expiry date for the options). There are two types of options: call and put options. Call options give the buyer a right (but not the obligation) to buy the underlying asset at a pre-determined price before the expiry date, while a put option gives the option-buyer the right to sell the security.
Options are attractive to hedgers because they protect against loss in value but do not require the hedger to sacrifice potential gains. Most exchanges that trade futures also trade options on futures. 

Futures Markets

Futures contracts are agreements to trade an underlying asset at a future date at a pre-determined price. Both the buyer and the seller are obligated to transact on that date. Futures are standardized contracts traded on an exchange where they can be bought and sold by investors.

OPTION PLAIN VANILLA STRATEGY

OPTION STRATEGY: 

BUY SBIN 285 CALL @ 4.45

Total investment =5562.50

Pay off table:...

Buying Options for the Purpose of Hedging

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 used.

In-the-money Covered Call Strategy

In-the-money covered call options are sold when the investor has a neutral to slightly bearish outlook towards the underlying security as their higher premiums provide greater downside protection.

Out-of-the-money Covered Call Strategy

This is a covered call strategy where the moderately bullish investor sells out-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 options are cheaper to buy than in-the-money options but 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 options can be considered the most expensive even though their premiums are lower than in-the-money options. This is because their time value is highest and time value is the part of the premium that will waste away as the expiration date approaches.

Call & Put Buying Combinations

RCOM STRATEGY UPDATE

RCOM STRATEGY

RCOM 65 MARCH PUT  BOOK PROFIT @ 4.5 (GIVEN & 2.4)

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STRANGLE IN RCOM WITH NEGATIVE BIAS

RCOM OPTION STRATEGY  

BUY RCOM MAR 65 PUT @ 2.4

BUY RCOM MAR 80 CALL @ 1.3

COST=3.7

TOTAL RISK  = 7400

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=83.7

LOWER BREAK GIVEN POINT=61.3

Pay off table:

STOCKS TO BUY FOR UNION BUDGET 2015-16

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.

Here are a few shares to buy ahead of Union Budget 2015-16.

Arbitrage Strategies and Price Relationships

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. 

When these 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. 

Synthetic Relationships

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 third one. 

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!

The various 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

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 Bullish The 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. 

SBI STRATEGY UPDATE

SBIN STRATEGY GIVEN ON 2 FEB 2015
SBIN 285 PUT WAS GIVEN TO BUY @ 4.8 NOW BOOK PROFIT    IN SBIN 285 PUT NEAR 9 CONTD...TO HOLD THE 350 CALL

SBI STRANGLE STRATEGY

BUY SBIN 285 PUT @ 4.8

BUY  SBIN 350 CALL @ 4

COST=8.8

TOTAL RISK  = 11000

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=358.8

LOWER BREAK GIVEN POINT=276.2

Pay off table:

Implied Volatility May Continue to Swing

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The last several months, the market has shown some good movement with some wild swings. The S&P 500 and Dow set their all-time highs once again, and then promptly moved lower. Now we are about to start the next earnings season and the roller-coaster ride may continue. It is important for option traders to understand one of the most important steps when learning to trade options; analyzing implied volatility and historical volatility. This is the way option traders can gain edge in their trades. But analyzing implied volatility and historical volatility is often an overlooked process making some trades losers from the start. An option trader needs to look back at the last couple of months of option trading to see how volatility played a crucial part in option pricing and how it will help them going forward.
Implied Volatility and Historical Volatility
Historical volatility is the volatility experienced by the underlying stock, stated in terms of annualized standard deviation as a percentage of the stock price. Historical volatility is helpful in comparing the volatility of a stock with another stock or to the stock itself over a period of time. For example, a stock that has a 30 historical volatility is less volatile than a stock with a 35 historical volatility. Additionally, a stock with a historical volatility of 45 now is more volatile than it was when its historical volatility was, say 30.

DAY TRADING USING OPTIONS

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With options offering leverage and loss-limiting capabilities, it would seems like day trading options would be a great idea. In reality, however, the day trading option strategy faces a couple of problems.

Firstly, the time value component of the option premium tends to dampen any price movement. For near-the-money options, while the intrinsic value may go up along with the underlying stock price, this gain is offset to a certain degree by the loss of time value.

Secondly, due to the reduced liquidity of the options market, the bid-ask spreads are usually wider than for stocks, sometimes up to half a point, again cutting into the limited profit of the typical day trade.

So if you are planning to day trade options, you must overcome this two problems.

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OPTION STRATEGY :DLF STRATEGY FOLLOW UP

BOOK PROFIT IN DLF 150 PUT NEAR 10.5-11

DLF OPTION STRAP STRATEGY

BUY 2 LOTS DLF 180 CALL @ 2.4

BUY  1 LOT 150 PUT @ 2.7

BUY  ONE  LOT DLF 150 PUT @2.7

BUY TWO LOTS  DLF 180 CALL @2.4

COST =5.1

TOTAL RISK  = 15600

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=185.1

LOWER BREAK GIVEN POINT=144.9

 For Pay off table click on read more:

LONG BUTTERFLY STRATEGY

Short two calls at the middle strike, and long one call each at the lower and upper strike.  The upper and lower strikes (wings) must both be equidistant from the middle strike (body), and all the options must be the same expiration.

Max Loss

The maximum loss would occur should the underlying stock be outside the wings at expiration.

Max Gain

The maximum profit would occur should the underlying stock be at the middle strike at expiration. 

HDIL STRANGLE STRATEGY

BUY HDIL 95 CALL @ 1.4

BUY HDIL 70 PUT    @ .90

COST=2.3

RISK PER LOT =9200

RETURN=UNLIMITED

UPPER BREAK GIVEN POINT=97.3

LOWER BREAK GIVEN POINT=67.7

PAY OFF TABLE:

Types of derivatives available in share markets

There are different types of derivatives available in share markets which are recognized as financial instruments. Share market experts accept derivatives as contracts between two or more parties (one type of security) that are practiced for trading or for share markets. The fluctuation of price and value of a derivative totally depends upon one or more financial assets.

In western developed economies there are various types of derivatives that are introduced much before. In National Stock Exchange of India, types of derivatives are used almost 10 years back. A few years after its released date in NSE and BSE, derivatives occupied an important financial platform to earn profit for shareholders or traders. Now these different types of derivatives are integral parts of Indian share markets.

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Is the Long Call Option the Same as the Short Put option?

Long calls are not the same as short puts. Buyers of option contracts are long, while sellers or writers of option contracts are short. Call and put options give you the right to buy or sell the underlying securities at specified prices, known as strike prices, before predetermined expiration dates. Long and short option strategies have different risk-return profiles, with downside risk usually limited for long positions.

Basics

The relationship between strike prices and market prices determines profits and losses. A long call is profitable when its strike price is below the market price of the underlying stock, while a long put is profitable when its strike price is above the market price. The reverse is usually true for short calls and puts. You pay a premium, which is the market price, when you open or buy an option contract, and you receive the premium when you sell or close an option contract.

ADJUSTMENT OF AN OPTION POSITION

Adjusting an option position really is an essential skill for any investor – I would even say it is a mandatory requirement. Properly managing risk by adjusting can help you repair strategies that have gone wrong, limit huge losses or even create additional potential gains As a disclaimer it’s important that you know both HOW to adjust an option trade and that you are aware of the additional broker commissions you will be charged to exit/enter additional contracts. Take your time when adjusting so that you don’t adjust and create an even bigger hole from which to dig out of.

1. What’s the goal?

 Make sure that you are either reducing risk somehow someway or  creating a new strategy that could make you more money.

2. Are you really reducing risk?

Forget for a minute that you are not going to make money if you get into a bad trade.

3. Should you just close out the trade?

This is always one of my 1st considerations. If you’ve made a small profit and things are starting to go south it might be a wise decision to just close out the trade and re-evaluate the market. Don’t let your ego get in the way of making money.

4. How have the market trend  changed?

I’m sure when you entered the trade you had a firm opinion on the market if the trend is changing then is your options strategy structured to profit from the new market Wait to see a medium term change to adjust and remember that 1 day doesn’t make a trend.

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