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Market Analysis - Technical View
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can any one tell me in detail how to understand this,frequently used by TV channels.
1-if nifty adds shares in open interest
what does it mean,short position or long build up
if nifty sheds shares on open interest,what does it show
2- how to know that call writing or put writing is being done on what strike price
3-how to know that short position is being build up in market...
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Mohan,
Another excellent trade in my opinion would be - sell a Jun2011 5700 CE at 500, and buy a Dec 2008 Nifty future with the intention of rolling it over till Jun 2011.
Margin requirement - 65000-70000
Less (premium received for 5700 call) - 25000
Reserve (assuming a Nifty low of 2800) - 60000
------------------------------------------------
Net requirement ------------ 100000
Maximum profit -------------- 170 * 50 = 85000.
Note that the reserve needs to be an FD and can earn interest... So effectivly you may end up doubling your money in 2 years by executing this trade once, and then forgetting abou it -- except rolling the future over every one quarter.
...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by :
mohanji
Dear Raj,
Q
I guess you mean net income of 500 as of now (if sold 4000 ce and bought 5700)... So maximum loss will be 1200, and maximum profit 500. I do not think it is a very good trade. The opposite probably is - buy a 4000 CE and sell a 5700 CE at a cost of 500... Max loss 500, max profit 1200
UQ
YOu are right.Buy 4000 CE and Sell 5700 CE .Sorry for the typo.Regards 
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dear rudra,
i must say u hav a very interesting and simple way to put things.now coming to the story part from the farmer\\`s point of view-i think that is aput.no matter where the prices of wheat are in the next 3 months even if they increase if he has made contract with with the company he wil hav to sel it at the decided rate.and the atta company- even if the wheat prices go down in the next 3 months they will hav to buy at the current market price as decided in the contract eventhough they may be incurring a loss.this is a call from the company\\`s point of view.
am i right?one more thing a few months back u had given a call on jai balaji.does it still hold good in the current market scenario?
thanks rashmi...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by :
rudra_sinha
Rashmi,
I have absolutely no idea about the difference between CE and CA. Call Reliance Money and get the clarification. In ICICIDirect, I get Call and PUT.
To make you understand the Option, I would write a small story here. And would ask you questions on that story to make it interactive. It would surely help you to understand the Options.
There are two pieces of the story.
First part:
A wheat farmer is expecting good wheat output in 3 months time from now. However, due to good weather conditions, he expects that all the farmers would have a good production of wheat this year and hence due to greater supply of wheat, the wheat prices would fall. Current market price is, say, 6000 rupees per ton and the farmer would like to sell his wheat at the current market price than reduced price 3 months later. So, definitely he would look to rope in a buyer who would agree to buy wheat from him 3 months down the line, but at the current market price.
Second part:
Now Annapurna atta company, who makes flour from wheat and sells in the market as packed atta or maida, expects the wheat price to go up 3 months later due to huge demand of flour during festive season. So they would like to rope in a seller/farmer who would agree to sell wheat to them 3 months down the line, but at the current market price.
Now, combining these two parts of the story, if the farmer and the Annapurna atta company came to a business relationship, what type of contract do you think is possible between them?
I would give you a clue. Think from both farmer and the atta company's perspective separately and you should get more than 1 types of contract.
Think through and answer the questions.
I shall explain in money put or call after I am through with the options concept itself.
Thanks,
Rudra
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If I am reading the situation right, you won't see many range bound days like Wednesday this month. There would be significant move either side that would take the straddle to the profitable position. Straddle should not be held till expiry.
I shall post in this forum when I see the best time to square off the straddle.
Thanks,
Rudra
P.S. I am off to MP for a vacation trip for the entire next week and thus would not be posting any message starting 6th October till 12th October....
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : mohanji
Dear Rudra,
Do you feel that one can get the chance to get some profit from this straddle during Oct contract?Is it worth waiting so long?Regards
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CE is a european call option - it can be exercised only after the trading session closes on the DAY THE CONTRACT EXPIRES. All index options are european options.
CA is an american call option - it can be exercised on close of trading on ANY DAY Till the day of expiry... All options for individual stocks are American options.
IT IS VERY RISKY TO WRITE american options.
IT IS QUITE SAFE TO WRITE european options....
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : rudra_sinha
Rashmi,
I have absolutely no idea about the difference between CE and CA. Call Reliance Money and get the clarification. In ICICIDirect, I get Call and PUT.
To make you understand the Option, I would write a small story here. And would ask you questions on that story to make it interactive. It would surely help you to understand the Options.
There are two pieces of the story.
First part:
A wheat farmer is expecting good wheat output in 3 months time from now. However, due to good weather conditions, he expects that all the farmers would have a good production of wheat this year and hence due to greater supply of wheat, the wheat prices would fall. Current market price is, say, 6000 rupees per ton and the farmer would like to sell his wheat at the current market price than reduced price 3 months later. So, definitely he would look to rope in a buyer who would agree to buy wheat from him 3 months down the line, but at the current market price.
Second part:
Now Annapurna atta company, who makes flour from wheat and sells in the market as packed atta or maida, expects the wheat price to go up 3 months later due to huge demand of flour during festive season. So they would like to rope in a seller/farmer who would agree to sell wheat to them 3 months down the line, but at the current market price.
Now, combining these two parts of the story, if the farmer and the Annapurna atta company came to a business relationship, what type of contract do you think is possible between them?
I would give you a clue. Think from both farmer and the atta company's perspective separately and you should get more than 1 types of contract.
Think through and answer the questions.
I shall explain in money put or call after I am through with the options concept itself.
Thanks,
Rudra
Tracked by: 2 Boarders
Rashmi,
I have absolutely no idea about the difference between CE and CA. Call Reliance Money and get the clarification. In ICICIDirect, I get Call and PUT.
To make you understand the Option, I would write a small story here. And would ask you questions on that story to make it interactive. It would surely help you to understand the Options.
There are two pieces of the story.
First part:
A wheat farmer is expecting good wheat output in 3 months time from now. However, due to good weather conditions, he expects that all the farmers would have a good production of wheat this year and hence due to greater supply of wheat, the wheat prices would fall. Current market price is, say, 6000 rupees per ton and the farmer would like to sell his wheat at the current market price than reduced price 3 months later. So, definitely he would look to rope in a buyer who would agree to buy wheat from him 3 months down the line, but at the current market price.
Second part:
Now Annapurna atta company, who makes flour from wheat and sells in the market as packed atta or maida, expects the wheat price to go up 3 months later due to huge demand of flour during festive season. So they would like to rope in a seller/farmer who would agree to sell wheat to them 3 months down the line, but at the current market price.
Now, combining these two parts of the story, if the farmer and the Annapurna atta company came to a business relationship, what type of contract do you think is possible between them?
I would give you a clue. Think from both farmer and the atta company's perspective separately and you should get more than 1 types of contract.
Think through and answer the questions.
I shall explain in money put or call after I am through with the options concept itself.
Thanks,
Rudra...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : rashmi26
dear rudra,
tnanx fr responding to my query.u wil hav to teach me a few things about trading in options.firstly i hav never traded in puts or calls.i find it difficult to understand them.on moneycontrol idfc page there are various strike prices fr ca and pa.whereas on rel money portal(i trade thru that)when v go to the derivatives page there are 4 options in inst type and in option type there 4 choices-ca, pa, ce ,pe.what is an in money put and in money call.pl explain these things to me.it wil b very helpful to me.thanx
regds rashmi
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That is a very good trade.. You will find that on the day these trades happened, there would have been a decent volume in 4000 puts as well... So someone was selling 4000 straddles to expire in Jun 2011 for about 1700... And buying a 5700 call for 500 :-) That is an even better trade.. Net profit as of now 1200... Total margin requirement - less than 1200... And a 5700 2011 call for free :-) Unlimited profits above 6200 :-) Downside losses below 2800 :-)...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : mohanji
Dear Raj,
Q
I guess you mean net income of 500 as of now (if sold 4000 ce and bought 5700)... So maximum loss will be 1200, and maximum profit 500. I do not think it is a very good trade. The opposite probably is - buy a 4000 CE and sell a 5700 CE at a cost of 500... Max loss 500, max profit 1200
UQ
YOu are right.Buy 4000 CE and Sell 5700 CE .Sorry for the typo.Regards
Tracked by: 2 Boarders
Dear Raj,
Q
I guess you mean net income of 500 as of now (if sold 4000 ce and bought 5700)... So maximum loss will be 1200, and maximum profit 500. I do not think it is a very good trade. The opposite probably is - buy a 4000 CE and sell a 5700 CE at a cost of 500... Max loss 500, max profit 1200
UQ
YOu are right.Buy 4000 CE and Sell 5700 CE .Sorry for the typo.Regards...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : raj_tibs
I guess you mean net income of 500 as of now (if sold 4000 ce and bought 5700)... So maximum loss will be 1200, and maximum profit 500. I do not think it is a very good trade. The opposite probably is - buy a 4000 CE and sell a 5700 CE at a cost of 500... Max loss 500, max profit 1200.
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Why selling options is better than buying options?
1. You get the time and risk premium rather than pay it
2. You can rollover your positions.... e.g. lets say i sell Oct 4000 PE, believing that the market will be above 4000 on Oct 2008. Now, if the Nifty is at 3800 on Oct 27, i can still rollover the position profitably! If you have noticed, the options for the next month are always more expensive than the current month. So on Oct 27, i will be able to buy the Oct 4000 put for about 250, and sell the Nov 4000 put for about 350!
Of course, 2 will work as long as you are able to maintain the margin requirements, and as eventually the market will go above 4000, you will not suffer a loss. If you had bought a 4100 call instead, your money is gone if Nifty falls!
Buying options is ok for the purpose of hedging... e.g. when buying a future, buy a put option to protect the losses on the downside (even here, i find selling an out of money call works better). e.g. if the market opens at 4100 tomorrow, and you are still bullish - buy a Nifty future, and sell a 4200 call (say for 100 rs). Now, you are maximum profit is limited to 200 (100 points on the future, and 100 for the call premium)... And on the downside, you do not make a loss till 4000 (but your losses are unlimited)
Lets say you protect the downside by buying a put - say 4000 put at Rs 100. Now your losses are limited to 200, and your profits are unlimited (but you make profits only if Nifty crosses 4200, when you buy the future at 4100).
One scenario where buying an option makes a lot of sense to me is when looking at really long term positions.... e.g. a position for more than 3 years.... So buy a Dec 2011 4000 PE at say 1000, and buy a future. You make profits if nifty goes above 5000. And if you think the Nifty will be above 7000 in Dec 2011, 1000 is a decent insurance for a possible profit of 2000... you can reduce the insurance by buying more futures (so buy 1 put and buy 2 futures).
...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : raj_tibs
I think selling a straddle is a good strategy (if it gets you 350 or more). Buy a strangle 3750 Pe and 4200 Ce to hedge against unlimited losses. This would give you approximatel 200 rs as maximum profit, and max loss would be similar.
Safer is sell a strangle (say 3900 Pe and 4100 ce), and protect losses by buying 3700 pe and 4300 pe.... Essentially you are taking a bull put spread, and a bear call spread.
I often use futures to hedge... So e.g. if i sell a 4000 straddle, i can buy a future if nifty crosses 4100 to hedge against the sold call, or sell a future below 3900 to hedge against the sold put. One needs to be agile and hav strict stop loss on the futures.
Please read the book "Futures, Options and other derivatives" for a better understanding of options. It also provides a lot of options strategies. (Authour Derek C. Hull, i think).
Note that no option strategy is good for all times. So one needs to choose the right strategy based on ones outlook.
1. Bull call spread -- buy an at the money call and sell an out of money call -- when you are bullish
2. Bull put spread -- sell an at the money put and buy and out of money put -- when you are bullish
3. Bear call spread -- sell an at the money call and buy an out of money call --- when you are bearish
4. Bear put spread -- buy an at the money put and sell and out of money put -- bearish
I prefer 2 and 3 over 1 & 4.
Any hedging implies taking a bullish and bearish position simultaneously... Selling straddles and strangles is a good strategy when you think market will be range bound, and buying straddles and strangles is good when you think market is going break out (either up or down) of the range...
Futures can always be used with options....
Covered call -- buy a future and sell an out of money call -- the premium you get by selling the call limits your losses on the future if the market goes down... It also limits your profits on the upside
Covered put - sell a future and sell an out of money put
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I think selling a straddle is a good strategy (if it gets you 350 or more). Buy a strangle 3750 Pe and 4200 Ce to hedge against unlimited losses. This would give you approximatel 200 rs as maximum profit, and max loss would be similar.
Safer is sell a strangle (say 3900 Pe and 4100 ce), and protect losses by buying 3700 pe and 4300 pe.... Essentially you are taking a bull put spread, and a bear call spread.
I often use futures to hedge... So e.g. if i sell a 4000 straddle, i can buy a future if nifty crosses 4100 to hedge against the sold call, or sell a future below 3900 to hedge against the sold put. One needs to be agile and hav strict stop loss on the futures.
Please read the book "Futures, Options and other derivatives" for a better understanding of options. It also provides a lot of options strategies. (Authour Derek C. Hull, i think).
Note that no option strategy is good for all times. So one needs to choose the right strategy based on ones outlook.
1. Bull call spread -- buy an at the money call and sell an out of money call -- when you are bullish
2. Bull put spread -- sell an at the money put and buy and out of money put -- when you are bullish
3. Bear call spread -- sell an at the money call and buy an out of money call --- when you are bearish
4. Bear put spread -- buy an at the money put and sell and out of money put -- bearish
I prefer 2 and 3 over 1 & 4.
Any hedging implies taking a bullish and bearish position simultaneously... Selling straddles and strangles is a good strategy when you think market will be range bound, and buying straddles and strangles is good when you think market is going break out (either up or down) of the range...
Futures can always be used with options....
Covered call -- buy a future and sell an out of money call -- the premium you get by selling the call limits your losses on the future if the market goes down... It also limits your profits on the upside
Covered put - sell a future and sell an out of money put
...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : mohanji
Dear Raj,
Well said.Thanks for your detailed analysis.
In the past I suffered in both... straddle spread (due to time decay) and in short strangle(due to unlimited losses).I wonder is ther any fool proof method( i mean less risky) to play in options to get atleast some profit if not substantial.How you see friday's market...any posn to be recommended?Regards
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Mohan,
these contracts are highly illiquid....
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : mohanji
Dear Raj,
Today in Zee Business... they were appreciating one caller for taking following posn:-
Sold CE nifty 4000 of Jun 2011 at rs 920
Bought CE nifty 5700 of Jun 2011 at rs 420
Net cost rs 500
How you analyse this long term option strategy? Are these sufficiantly liquid?
Regards
Tracked by: 2 Boarders
I guess you mean net income of 500 as of now (if sold 4000 ce and bought 5700)... So maximum loss will be 1200, and maximum profit 500. I do not think it is a very good trade. The opposite probably is - buy a 4000 CE and sell a 5700 CE at a cost of 500... Max loss 500, max profit 1200....
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : mohanji
Dear Raj,
Today in Zee Business... they were appreciating one caller for taking following posn:-
Sold CE nifty 4000 of Jun 2011 at rs 920
Bought CE nifty 5700 of Jun 2011 at rs 420
Net cost rs 500
How you analyse this long term option strategy? Are these sufficiantly liquid?
Regards
Tracked by: 2 Boarders
Dear Rudra,
Today in Zee Business... they were appreciating one caller for taking following posn:-
Sold CE nifty 4000 of Jun 2011 at rs 920
Bought CE nifty 5700 of Jun 2011 at rs 420
Net cost rs 500
How you analyse this long term option strategy? Are these sufficiantly liquid?
Regards...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : rudra_sinha
For a newcomer, hold on to your straddle and square off the whole straddle when it is in profit.
Tracked by: 2 Boarders
Dear Raj,
Today in Zee Business... they were appreciating one caller for taking following posn:-
Sold CE nifty 4000 of Jun 2011 at rs 920
Bought CE nifty 5700 of Jun 2011 at rs 420
Net cost rs 500
How you analyse this long term option strategy? Are these sufficiantly liquid?
Regards
...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : raj_tibs
Dear Mohan,
Option premia are a function of market volatility. If amrket volatility comes down, options premia would also come down. Add to that a time decay - e.g. if Nifty stays at 4000 till 29th Oct, the value of the straddle will come down to about 40.
A straddle yields profits ONLY if the market breaks out in either direction. Otherwise it is almost always a losing strategy, unless you trade in staggered square-offs (which then makes it a high risk strategy).
You can improve the probability of profits by selling a strangle (assuming you have already bought a straddle). e.g. if you bought a 3900 straddle, sell a 4000/4100 call and a 3800/3700 put. This will bring down the cost of your straddle.
Selling a straddle/strangle and buying an outer strangle is likely to be far more profitable in the long run - as you get the risk AND time premia, rather than pay it... Selling/writing options is like selling insurance... Insurance compaines always make profits because they get the risk premia... Of course, writing options involves risks, that needs to be well managed to avoid losses (which can be unlimited).
In fact, day before itself i had recommended selling a 3900 straddle for around 350-370, and buying a 3750/4200 strangle for around 170. That is likely to be a far more profitable trade than buying a straddle. You are unlikely to make substantial gains (not sure if i understand your definition of substatial gains :-) on the 3900/4000 straddle, unless the Nifty moves at least 250 points up/down.
Regards
Tracked by: 2 Boarders
Dear Rudra,
Do you feel that one can get the chance to get some profit from this straddle during Oct contract?Is it worth waiting so long?Regards...
In reply to:
HELP HELP HELP !!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by : rudra_sinha
For a newcomer, hold on to your straddle and square off the whole straddle when it is in profit.
