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@rm
ReplyDeleteI checked that option strategy,the basis is time erosion in options...and protecting the premium collected by futures
Read about option price before you apply that strategy...learn how time affects option pricing,Yes SAR can be used in that strategy as it tell you when a trend changes.
Work on it...let us know the progress from time to time
good luck
Anuj,
ReplyDeletehave you tried writing out of the money call for near month Nifty Future option as a way of protecting capital and some income generation? The time value will erode sharply favouring the call writer. Now say you have a portfolio of 5 lakhs. One call writing at current price of nifty will roughly protect about 50x5000 = 2.5 lakh. If the market moves up and you need to cover the call at a loss, since your portfolio is twice as big, that should adequately cover your loss. Your comments please?? I have not done this yet. But thinking of it .....
Thank you Anuj! Working on the planning part since long - gathering courage for the jump. :)
ReplyDeleteHi Student of markets
ReplyDeleteI have never traded in options...as I dont understand them ...and they are illiquid specially stock options...so I never got down to finner points in options
I dont think your way to hedge is right one
when you write options
you get 50 (nifty lot size) * its premium lets say 100
So maximum profit is 5000...and considering 5 lakh portfolio 5000 is just 1 percent...so I dont think this is nice way...as you will have to keep a margin as well for selling option...
Check the detail with your broker...even brokerage is very high 1% of premium value or 100 rs which ever is more for me...some are less as well...I never negotiated
Check option calculation model and how time affects option value...your objective should be clear...if its hedging futures are better as they are more liquid and low brokerage(cost)
Do write your thoughts
Cheers
@r m
ReplyDeleteI will see and read about option in future
And perhaps come up with some kind of calculator that predicts time value for future ...with certain assumptions
All the best to you ...can you share some thoughts about above question from student of markets?
Cheers
@anuj
ReplyDeleteThe selling of calls to protect holdings is a practice but good for stocks only. Let us say we have 300 reliance which are lying idle in the portfolio. Just selling out of money calls at the beginning of month will mean that we have given a small protection from decline and in case RIL shoots above strike price of sold option you can liquidate some shares and pay off the call buyer - you are just sharing the profits you made on the underlying. These practices are good for those holding huge idle portfolios.
Anuj, rm,
ReplyDeletethanks for the feedback. I guess hedging is not the right goal - probably income generation is. rm is right in his analysis. But you can do that in nifty also just not stocks - e.g. suppose u have 500 Nifty BEES which is really 50 Nifty points in your portfolio. Then you can generate a little money by writing call option. The reason that writing naked call option is dangerous is that you have unlimited loss potential. But if you have the underlying security as I described above, it is not really naked anymore. ... anyway, money making is not easy - if something is too good to believe, then usually it is!. Which is why, I have not tried it real like with nifty though I have done with IBM stock once. Thanks a lot for helping the clear my thoughts ....
@ rm
ReplyDeletegood strategy...but just calculate how many options he will have to write to offset a % percent loss in 300 reliance stock
Can you do the maths...and then the margin involved /brokerage as well...I dont know how good that idea is
Hedging with futures is a better one ?
Regargs
Yeah! I agree, actually it is not hedging - this is just using idle portfolio to generate sure income. And the margin is created by the idle portfolio itself so we need not take that into account. But you surely won't like it because as a successful trader you can earn many times more - it is for the like of us wannabes! :)
ReplyDelete@SOM
ReplyDeleteall this talk of "unlimited loss" while selling option
and "unlimited profit" while buying options is a marketing gimmick...
HOW?....Because a thing cannot fall below Zero and rise to infinity
So if you buy option you have unlimited profits because profits can rise to infinity ...but most option buyers lose money,the complete value of premium paid
While when selling option brokers tell you dont do it as it has "limited profit" because you can only make the value of premium(if it settles at zero at expiry) and its value can rise to infinity...thus giving you "unlimited loss"(but that rarely happens)
my simple rule is buy options when markets in range expansion mode
and sell options in range contraction mode
Bollinger bands can be of immense help as an indicator apart from option calculator...and other technical analysis of over all markets
Cheers
Anuj, I agree. I believe in managing risks while writing options. At least the market provides the edge in your favour in writing options. But it does require significantly more capital - most retail traders have this disadvantage that they are not well capitalized ( me included ) - this reminds me of the old saying that u need money to make money !!! cheeers
ReplyDelete@SOM
ReplyDeleteI completely agree
Thats capitalism...rich getting richer ...poor getting poorer
Even I am under capitalized...to take option trading and protecting them with futures,and getting stuck with few index or stocks...but i will surely explore it in future
hi
ReplyDeletejust a thought..
the poor works for money
the money works for the rich..
ironical !!
shazia