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22 December 2006

how to write option

Options Writing…..Since many are new to Options Writing, let me begin with write from the basics. Like the two sides of a coin there are two aspects of a trade – Buy & Sell. In options, if you are bullish you Buy a Call or if you are bearish you Buy a Put. This is what the traders in general do, but the savvy and expert option trades choose to follow a different path. What they do is Sell Puts if you are bullish and Sell Calls when bearish. Since Selling an Option involves creation of new position in options it is know as Options Writing. When you buy options, theoretically speaking your losses are limited, but your gains are unlimited. But Options are a wasting asset since their value decays over time and becomes zero by the end of expiry, typically the pace of decay is the fastest in the last week to expiry. To give you an analogy Options are like Ice, what happens to ice if you keep it outside……it melts away as time pass by, the same thing happens with options. And Option Writers take advantage of this and make profits. Of course for getting this advantage the Option Writers have to keep a maintain a margin. In case of Nifty the margin is 10 – 12% of the contract value.How to Write OptionsKnow the biggest question is at what strike we have to write options. For this as I had mentioned in my earlier post, try and figure out what the market range has been and then decide about the strike price at which to sell options. In my case I usually write options which at a strike of 5% to 7.5% above (for calls)/below( for puts) the market, depending upon the momentum.I'll take the recent example to tell you at what levels I would have written options – both calls as well as puts.During the last week and the beginning of this week, we have seen nifty ranging from 3600 to 4000 levels, and from technical analysis the levels we get is 3750 & 3950 for support and resistance respectively. From this I believe that nifty cannot go below 3600 and 4000 on the upper side. Based on this I have traded the following options at the following price per lotUnderlying Call / Put Lot Size Strike Price Expiry Premium Contact Value Margin to be Maintained @ 10% Premium Received Nifty Put 100 3600 Dec 06 22.00 360000 36000 2200 Nifty Put 100 3600 Jan 07 72.00 360000 36000 7200 Nifty Call 100 4000 Dec 06 20.00 400000 40000 2000 Nifty Call 100 4000 Jan 07 75.00 400000 40000 7500 Transaction Cost:While trading in options, the biggest hurdle is the transaction costs. I have 3 trading accounts and their brokerage structure decides what level of profits you make L , sounds strange but it is true, that is why I shifted to a low cost broking firm – Geojit.Firm Brokerage – one side Service Tax STT Average Break Even Cost in Rs. Per lot for buying & Selling per lot including the levies Kotak 0.09% on (Strike price * lot size) 12.25% 0.01742% Rs.8.00 ICICI Direct 0.05%on (Strike + Premium) * Lot size 12.25% 0.01742% Rs.5.60 Geojit Rs. 75/- per lot 12.25% 0.01742% Rs.3.10 Average Brokerage calculated based on my trading with the above broking firms for trades in nifty. Now you see how this will affect your profits in case you write the options belowCall / Put Strike Price Expiry Premium Premium Received Proft after brokerage=(Avg Brkg * lot size) Kotak ICICI Geojit Nifty Put 3600 Dec 06 22.00 2200 1400 1640 1890 Nifty Put 3600 Jan 07 72.00 7200 6400 6640 6890 Nifty Call 4000 Dec 06 20.00 2000 1200 1440 1690 Nifty Call 4000 Jan 07 75.00 7500 6700 6940 7190

by erectusplus at 10:17:00 |