Nifty option writing

What is the strategy --- SHORT GUT : sell CALL from lower strike and sell PUT from higher strike (strike price higher than current price of underlying).

When to enter --- this is the real trick which suddenly struck me. Enter SHORT GUT in the middle of earlier month of expiry (e.g. For July expiry sell CE and PE around mid-June) and in next 20 - 25 days one can easily cover both positions about 100-120 points lower.

Example - On 20 Feb Nifty spot was 8800 so sold 8500 CE and 9000 PE for March expiry for a total premium of about 750 and by 10 Mar covered the same for 550 (profit of 200)

On 20 Mar Nifty spot was 8600 so sold 8300 CE and 8800 PE for April expiry for a total premium of about 650 and by 17 Apr covered the same for 530 (profit of 120)

On 20 Apr Nifty spot was 8450 so sold 8200 CE and 8700 PE for May expiry for a total premium of about 640 and by 20 May covered the same for 520 (profit of 120).

It so happened that in between the total premium went higher but since this GAME is for 20-25 days, one can wait patiently. But somehow if the premium remains on higher side till two days before expiry (which means NIFTY has swung outside no-loss zone), then add some capital to sell more CE or PE (as the case may be) so as to get out at least in no profit no loss manner.

So, are we game for July expiry?

It looks like till mid-July NIFTY will remain range-bound between 8000 and 8500. Thus, I am planning to sell July 8000 CE and 8500 PE late next week for a premium of about 680 - 700 points and then cover the positions for about 550 points by 10-15 July.

comments invited.

How to write option successfully

WRITING OPTIONS 

Writing out-of-money options allows you to garner small and consistent returns, during adverse market conditions. Read on to figure out what these options are and how you can make a quick buck on them 

WHAT are the chances of SBI touching Rs 780 by the end of this month? Not very bright, you might say.Then, why not write an SBI Rs 780 call option and earn some low risk income? This practice is popularly known as writing out-of-money options. As a result, you can hope to make some decent income in the form of the premium received on writing the option. 

Writing options 

First, you must be familiar with option basics. An option can be either out-of-money, in-the-money or at-the-money. A call option is said to be in-the-money if the current market value of the underlying share is above the strike price of the option. Similarly, a put option is said to be in-the-money if the current market value of the underlying asset is below the strike price of the option. For instance, if the current price of Infosys is Rs 2,100, an Infosys 2,000 call option (strike price is Rs 2,000) and Infosys 2200 put option (strike price is Rs 2200) are in-the-money. 

At-the-money simply means that the current market value of the underlying asset is the same as the strike price. For instance, if the current price of Infosys is Rs 2,100, then Infosys 2100 call and put options (strike price is Rs 2,100) are at-the-money. 

A call option is said to be out-of-money if the current price of the underlying share is below the strike price of the option. A put option is said to be out-of-money if the current market value of the underlying share is above the strike price of the option. For instance, if the price of Infosys is currently Rs 2,100, then an Infosys 2,200 call option (strike price is Rs 2,200) and Infosys 2,000 put option (strike price is Rs 2,000) are outof-money. 

Out of money options 

Logically, you should write a call option when you expect the underlying stock to stay at the same level or fall. Similarly, you could write a put option when you expect the price to stay at the same level or rise. As an option buyer, your risk/ loss is limited to the premium that you have paid. On the other hand, as an option seller, your risk is unlimited whereas your gains are limited to the premiums that you earn. 

Hence, writing call and put options are considered to be quite risky as the losses can be unlimited, if the value of the underlying asset increases above the exercise price. For instance, if you write or sell one Infosys 1 month at-the-money call option at a strike price of Rs 2,100, when the cash price is also Rs 2,100, you would get a decent premium 
of anywhere between Rs 50-70. But the risk 
you would be carrying is quite high. If the 
price of Infosys rises to more than Rs 2,400 on expiry, then you could stand to lose anywhere between Rs 220-250 per share (Since, the option is cash-settled, the loss will be the cash settlement amount, reduced by the premium). 

However, it is always less risky to write out-of-money options, as the strike price is at a premium to the spot price. For instance, if you had written an April call option on SBI at Rs 740, on the March 29, 2005 (when the cash price was Rs 640), you would have received a premium of Rs 5.35 per share.The writer of such options gains because of the erosion of time value of options. As on April 11, 2005, the premium on the same Rs 740 call option falls to Rs 2.45, as the time to maturity narrows down. So, you could just wait till the option matures (at the end of April), hoping that it will expire as worthless. Or, if you feel that would be risky, then you could even square up your position, and earn a net of around Rs 3. 

In the same manner, if you had written out a Rs 600 April put option on SBI, you would have earned a premium of Rs 7. As on April 11, 2005, the premium on this option was around Rs 3.5. Currently, there is a Rs 780 April call option on SBI, which could earn you a premium of Rs 1.95. Even though you stand to get a much lower premium than you would earn, by writing options quoting nearer the current market price, the risk is also much less, in such options. 

Many a times, it gets difficult for investors to exit positions that they have built over a period of time. At such times, they could look at selling �out of the money� call options to hedge themselves and get an additional cushion on the portfolio values. Besides, a study of the options market shows that 80-90 per cent of options expire worthless. Hence, by following the strategy of writing out-of-money options, you can garner small and consistent returns, during adverse market conditions. 

IN BRIEF

An option can be either out-of-money, inthe-money or at-the-money. 

A call option is said to be out-of-money if the current price of the underlying share is below the strike price of the option. 

It is always less risky to write out-ofmoney options as the strike price is at a premium to the spot price. 

The writer of such options gains because of erosion of the time value of options. 

Although the premium earned on such options is not much, the risk is also low. 

A study of the options market shows that 80-90 per cent of options expire worthless.

Option writing for Delivery shares

BUY LOT QUANITY IN DELIVERY

HOLD ON DELIVERY

FIX A TARGET PRICE

SHORT CALL OPTION OF TARGET PRICE

EXAAMPLE IF ANY BODY LONG IN HINDALCO AND HIS TARGET PRICE IS 130

THEN SHORT 130CALL AND ENJOY PRIMIUM AS DIVIDEND OF JULY MONTH

"OPTIONS WRITING: ADVANTAGE & DISADVANTAGE"

PTIONS WRITING: ADVANTAGE & DISADVANTAGE"

INTRODUCTION:

Option writing is a term used to describe any option trading strategy that involves selling options. This is the act of creating and selling new options contracts in the public exchange. In layman terms, options writing is options trading term for "shorting" options. Options writers are simply the people who short options. Since the invention of options trading, options writing has been worshiped as being the "pro" way of trading options and a way to play "bookmaker". So what exactly is options writing, what happens when you write an option and how is options writing profitable? 
WHAT EXACTLY OPTIONS WRITING:

Well, if writing options is simply "shorting" options, why call it options writing and not simply "shorting" like in stock trading? Even though the effects of writing an option is the same as shorting a security such as a stock, the internal process and logic is actually quite different, which justifies the different terms used.

The term "writing" actually comes from the insurance industry where insurers underwrite policies. Indeed, options are a form of "insurance" for stocks when used for hedging purpose. When you write an insurance policy, a new policy is created just for you which did not exist before. That is also what happens when you write an option. When you write an options contract, you are playing "insurer" and creating brand new an options contract that did not exist in the marketplace before. It is exactly like you writing up a new contract for sale to the holder, hence the term "writing an option". When one contract of an option is written in options trading, the open interest for that options contract increases by one, informing all options traders that there are now one more active options contract in the market.

In contrast, when you short a stock, you are not creating a new share of stock in the marketplace but rather borrowing shares from the broker and selling it when you don't own it. Hence it is a short sale. As you can see, the process of shorting is totally different from the process of writing an option, which is why the terms are different.

HOW DO YOU WRITE OPTIONS?

Anyone with an options trading account can write options in the market as long as you have enough cash to cover margin requirements. Margin is cash you need to have in your account before you are allowed to write options or perform credit spreads. It is like having the capital to start selling options as a business.

You can write options simply by using the Sell to open order. Your broker would do all the internal processes of creating a new options contract and selling it in the marketplace. The process is really invisible to the trader and the effect is exactly like shorting a stock.

For example:  XYZ company shares are trading at Rs. 50 right now. Rs. 50 strike price Call Options are trading at Rs. 2.00.  In order to write its Rs.50 you need to Sell To Open those Rs.50 strike price call options and receive Rs. 200  (Rs. 50 X 2) in your account for each contract written.

Conversely, in order to close out options positions that you wrote, you need to use the Buy To Open order.

On the above example, XYZ company shares are trading at Rs. 50 right now. Rs. 50 strike price Call Options are trading at Rs. 2.00.  In order to close the Rs. 50 call options position that you wrote, you need to Buy To Close those Rs. 50 strike price call options. Doing so buys back that options contract you wrote and closes the trade.

There are so many procedures for call and/or put writing. Some of them are Covered call writing, Naked call writing, Naked put writing, Bear call Spreads and Bull put Spreads.  One may find out the details on Wikipedia.
When you write call options without owning the underlying stock, your position is not covered and hence a "Naked Write". This means that you are writing a call option, giving someone the right to buy the stock from you when you do not have the stock in the first place. This is why margin is required for naked writes. Margin makes sure that when the call options are exercised, you have the cash to buy the stock from the market in order to deliver to the person who bought your call options. When you own the underlying stock, the call options you wrote would be considered a "Covered Write" as in the Covered call options trading strategy.

WHY WRITE OPTIONS (ADVANTAGE):

When you write an option, the buyer of your options contract pays you an amount of money for the risk that you are undertaking. This is known as the options premium. Upon expiration of the options contract, if the option is not exercised, you get to keep that premium as profit.

Following up on the example above, you get to keep the Rs. 200 of options premium if XYZ stock closes at or below the strike price of Rs. 50.

Yes, this means that by writing call options instead of shorting the stock itself, you not only profit when the stock goes down but also when the stock does not move at all! Doesn't that sound like playing bookmaker? That is why options writing is playing bookmaker to traders who wants to do a directional bet.

Another advantage of options writing is that it puts Time Decay in your favour. Time Decay is the number one enemy of options buyers. It is the phenomena where options become cheaper as expiration date draws nearer. When options become cheaper over time, it becomes more profitable for the options writer to buy back those options they wrote in order to close the position.

Following up on the example above, 10 days after you write those call options, XYZ stock remained stagnant and its Rs. 50 strike price call options is now asking at Rs. 1.10. You can now buy to close the call options you wrote at Rs. 1.10, making a profit of Rs. 0.90 (since you sold it for Rs. 2.00).

DISADVANTAGE OF OPTIONS WRITING:

The clear disadvantage of options writing is the fact that you are liable to the fulfillment of the terms of the options that you wrote. If you wrote a call option, you are liable to selling the stock at the strike price no matter what the prevailing market price of the stock is.

Following up on the example above, assuming XYZ stock rises to Rs. 80 upon expiration of the Rs. 50 strike price call options. The call options you wrote gets assigned and you need to buy the stock at the market price of Rs. 80 and sell it to the holder of your call options at the strike price of Rs. 50, incurring a loss of Rs. 30 per share.

As you might have noticed by now, writing options subject you to unlimited loss liability,  putting you deeper into loss as long as the underlying stock move against your favour. As such, even though options writing has the ability to profit from 2 of the 3 possible directions, the unfavourable direction would subject you to unlimited liability.
Options writing also requires significant margin, which means that you need a lot of cash in your account before you are allowed to write a single options contract. In some cases, you need as much as Rs. 100,000 in your account before you allowed to write a single options contract. This high margin requirement usually stop options writing from being a strategy for options trading beginners or traders with very small accounts. one may find out from their Broker as to what actual margin money is required since the Broker charges different margin money (a little bit) to their client. However, in a covered call writing (when you usually own the same number i.e., lot size of stocks in cash segments), no margin money is required but in that case those stocks will be freeze for your selling in Cash Segment till expiry or you cover your written call whichever is earlier.

In a nutshell, the primary objective in writing options is to earn the premium paid by the option buyer. An option writer sells options intending to profit from the decline of extrinsic value on options, referred to as time value. If the option expires without being exercised, the writer keeps the full amount of the premium. If the option buyer exercises the option, however, the writer must pay the difference between the market value and the exercise price.

Note: One must be fully aware about the strategies for call writing, otherwise, it may causes a heavy loss. It is understood that those who wishes to learn about Call Writing, they surely know about option trading and its effect.

Writing options for a living

Option writers are the only people who consistently make money (in bullish or bearish markets) and rarely ever lose!

Option writing is a profitable and interesting concept. It is interesting because the profits are limited but investments are high (margin against possible losses).

Option writers typically trade the time decay and volatility; the extent the market moves is secondary! On the contrary, the option buyer has a good chance of earning only if the market shows fast moves.

So why would anyone in his senses write options?

Recall that for option buyers, if the targeted price is not achieved within a certain number of days, he has lost money. So the option buyer needs to be sure of the trend so that he can make money. Also recall that towards expiry, the premium will progressively reduce to zero if there is no change in the value of the underlying...this is because of the time-decay factor in option premiums.

It is the premium component (time decay factor) which excites option writers. The income is fixed but certain if you get the trend right and are smart enough to do some clever hedging.

In reality, option writers rarely ever lose money.

Investment required

The investment is the same as that payable on the futures less the premium component.

Example - for writing a Nifty (call or put) option strike price 4000 with premium say Rs.100/-, the amount required is 4000*50*15% - 50*100 = Rs.30,000/-.

Here, 15% is the margin rate fixed by NSE for nifty derivatives and 50 is the market lot.

Slow and steady wins the race

Always. And this is true of the stock markets as well.

While most investors are driven by greed and high profit targets, option writers are satisfied with relatively low returns. They are not interested in 50% gain in a month...in fact they are very happy even if they earn 10% per month. Eventually the option writer wins as this money is assured even if the markets are bullish or bearish.

Should you write options?

Yes. If you are looking at fixed returns irrespective of market direction, then option writing could be for you.

Note that while option buyers are small investors, option writers are extremely clever and smart traders who rarely lose money.

In fact, all over the world including India, option writers are the only people to consistently make money. And this whether the markets are bullish or bearish!

- See more at: http://www.vfmdirect.com/info/option_writing.html#sthash.MjWk99Zo.dpuf