Covered Call

Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets. Your volume of assets owned should be equivalent to the number of assets underlying the call option. Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits (through receipt of the call premium), or protect against a potential decline in the underlying asset's value.

WHAT ARE OPTION ? AND TYPES OF OPTION

OPTION

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

CALLS AND PUTS

The two types of options are calls and puts:

A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

Participants in the Options Market

There are four types of participants in options markets depending on the position they take:

·              Buyers of calls

·              Sellers of calls

·              Buyers of puts

·              Sellers of puts

People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions.

Why Use Options?

There are two main reasons why an investor would use options: 
Speculation 
speculation as betting on the movement of a security. The advantage of options is that you aren't limited to making a profit only when the market goes up. Because of the versatility of options, you can also make money when the market goes down or even sideways. Speculation is the territory in which the big money is made - and lost. The use of options in this manner is the reason options have the reputation of being risky. This is because when you buy an option, you have to be correct in determining not only the direction of the stock's movement, but also the magnitude and the timing of this movement. To succeed, you must correctly predict whether a stock will go up or down, and you have to be right about how much the price will change as well as the time frame it will take for all this to happen.

Short Butterfly

The short butterfly is a neutral strategy like the long butterfly but bullish on volatility. It is a limited profit, limited risk options trading strategy. There are 3 striking prices involved in a short butterfly spread and it can be constructed using calls or puts. 

SHORT BUTTERFLY CONSTRUCTION

Ø  SELL 1 ITM CALL

Ø  BUY 2 ATM CALLS

Ø  SELL 1 OTM CALL

Short Call Butterfly

Using calls, the short butterfly can be constructed by writing one lower striking in-the-money call, buying two at-the-money calls and writing another higher striking out-of-the-money call, giving the trader a net credit to enter the position.

OPTION PLAIN VANILLA SBIN STRATEGY :UPDATE

BOOK PROFIT IN SBIN 285 CALL  @12.50 CALL WAS GIVEN@4.45  IN  POST
TOTAL INVESTMENT =5562
NET RETURN=15625

BUYING OPTIONS

The most basic of options strategies is to simply buy call or put options. When you buy options, you are said to have a long position in that option. You have a long call position when you buy calls or a long put position if you buy puts.

Generally, when you are bullish on the underlying asset, you can buy call options to implement the long call strategy and when bearish, you buy put options to implement the long put strategy.

In both cases, you hope that the underlying stock price move far enough to cover the premiums paid for the options and land you a profit.

Cost Considerations When Buying Options 
The price you pay to own the option is called the premium which is affected by many factors such as moneyness, time to expiration and underlying volatility.

Moneyness                

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.

Time to Expiration

Obviously, the longer the time to expiration, the more chance the option buyer have for the underlying price to move in the right direction and therefore the more expensive the option.

Selecting the Right Option to Buy

Which strike price and expiration you choose all depends on your outlook of the underlying. For instance, if you believe that the underlying will make an explosive move upwards very soon, then it makes sense to buy an at-the-money call option expiring in the nearest expiration month.

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.

How to Trade Options – Options Trading Basics

All investors should have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay.

What’s more, option strategies can help you hedge your portfolio and limit potential downside risk. No investors should be sitting on the sidelines simply because they don’t understand options. 

What is the difference between Intraday Trading and Delivery Trading?

When you buy and sell a stock within the same day, it is called Intraday Trading. When you purchase shares and hold them overnight, then you take delivery of the shares and hence, this is called Delivery Trading.

You can trade in two different ways in share markets. You can either do intraday trading or you can opt for delivery based trading (investment). Intraday trading is typically completed within a day – this means that you have to sell the shares that you have purchased on that day before the closing of markets. Even if you don’t sell the shares by yourself, they are automatically squared off before the closing. On the other hand, in delivery based investments, you are not required to buy and sell shares within a day and you can hold them for as long as you want.
Advantages

There are quite a few advantages of Intraday Trading, the biggest one being that you are allowed to buy shares without paying the full price of the shares (Paying only the margin money). The market makers allow you pay only a part of the price to hold the shares. So, you can gain more by investing less. But this means that your losses would be higher as well. Intraday trading also allows you to short sell the shares – selling shares even before buying them (but buying before market closes). This is one benefit that can give you profit even when the price of the share is sure to fall. 
The brokerage for intraday trading is always lower than that for delivery trading.

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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OPTION CALL & PUT + OPTION STRATEGY 

NIFTY FUTURE + OPTION CALL & PUT

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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

FOR BEST OPTION TIPS FILL UP THE FORM GIVEN TO YOUR RIGHT SIDE>>>>
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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