Means ,
Covered Call
Buy Nifty Fut Oct @ 5950 - 6010 + Short NIFTY Call 6300 of oct 2010 expiry @ Rs. 42.40.
or,
You can do long combo means
Buy NIFTY Call oct 2010 expiry 6300 @ Rs. 43.55 + Short NIFTY Put oct 2010 expiry 5800 @ Rs. 96.80
Thursday, September 23, 2010
Current Trading Strategy on NIFTY @ 5953
Market is not looking for bearish mode by next expiry. You can take long position in NIFTY from the current levels or you can do covered call means Buy Nifty Fut Oct @ 5950 - 6010. You can buy at any level between given range and Stop loss should be @ 5800 - 5820 + Short NIFTY Call 6300 of oct 2010 expiry @ Rs. 42.40.
Saturday, September 18, 2010
WHEN NIFTY IS MODERATELY BEARISH - STRATEGY 6: SYNTHETIC LONG PUT, STRATEGY 16: BEAR CALL SPREAD & STRATEGY 18: BEAR PUT SPREAD
STRATEGY 8 : PROTECTIVE CALL / SYNTHETIC LONG PUT: SHORT STOCK + BUY OTM*/ATM* CALL
*OUT-OF-THE MONEY
*AT-THE- MONEY
This is a strategy wherein an investor has gone short on a stock and buys a call to hedge. This is an opposite of Synthetic Call . An investor shorts a stock and buys an ATM or slightly OTM Call. The net effect of this is that the investor creates a pay-off like a Long Put, but instead of having a net debit (paying premium) for a Long Put, he creates a net credit (receives money on shorting the stock). In case the stock price falls the investor gains in the downward fall in the price. However, in case there is an unexpected rise in the price of the stock the loss is limited. The pay-off from the Long Call will increase thereby compensating for the loss in value of the short stock position. This strategy hedges the upside in the stock position while retaining downside profit potential.
When to Use: If the investor is of the view that the markets will go down (bearish) but wants to protect against any unexpected rise in the price of the stock.
Risk: Limited. Maximum Risk is Call Strike Price – Stock Price + Premium
Reward: Maximum is Stock Price – Call Premium
Breakeven: Stock Price – Call Premium
Example :
Suppose NIFTY is trading at Rs. 5920.70 in Oct expiry 2010. An investor Mr. A buys a Rs 6000 Oct 2010 expiry call for Rs. 95.85 while shorting the stock at Rs. 5920.70. The net credit to the investor is Rs. 5824.85 (Rs. 5920.70 – Rs. 95.85).
Strategy : Short Stock + Buy Call Option
Sells Stock (Mr. A receives) Current Market Price (Rs.) 5920.70
Buys Call Strike Price (Rs.) 6000
Mr. A pays Premium (Rs.) 95.85
Break Even Point (Rs.) (Stock Price – Call Premium) 5824.85
Thursday, September 16, 2010
WHEN NIFTY IS MODERATELY BULLISH - STRATEGY 7: COVERED CALL, STRATEGY 15: BULL CALL SPREAD & STRATEGY 17: BULL PUT SPREAD
STRATEGY 7 : COVERED CALL : BUY STOCK + SELL OTM* CALL
*OUT-OF-THE MONEY
You own shares in a company which you feel may rise but not much in the near term (or at best stay sideways). You would still like to earn an income from the shares. The covered call is a strategy in which an investor Sells a Call option on a stock he owns (netting him a premium). The Call Option which is sold in usually an OTM Call. The Call would not get exercised unless the stock price increases above the strike price. Till then the investor in the stock (Call seller) can retain the Premium with him. This becomes his income from the stock. This strategy is usually adopted by a stock owner who is Neutral to moderately Bullish about the stock.
An investor buys a stock or owns a stock which he feel is good for medium to long term but is neutral or bearish for the near term. At the same time, the investor does not mind exiting the stock at a certain price (target price). The investor can sell a Call Option at the strike price at which he would be fine exiting the stock (OTM strike). By selling the Call Option the investor earns a Premium. Now the position of the investor is that of a Call Seller who owns the underlying stock. If the stock price stays at or below the strike price, the Call Buyer (refer to Strategy 1) will not exercise the Call. The Premium is retained by the investor.
In case the stock price goes above the strike price, the Call buyer who has the right to buy the stock at the strike price will exercise the Call option. The Call seller (the investor) who has to sell the stock to the Call buyer, will sell the stock at the strike price. This was the price which the Call seller (the investor) was anyway interested in exiting the stock and now exits at that price. So besides the strike price which was the target price for selling the stock, the Call seller (investor) also earns the Premium which becomes an additional gain for him. This strategy is called as a Covered Call strategy because the Call sold is backed by a stock owned by the Call Seller (investor). The income increases as the stock rises, but gets capped after the stock reaches the strike price. Let us see an example to understand the Covered Call strategy.
When to Use: This is often employed when an investor has a short-term neutral to moderately bullish view on the stock he holds. He takes a short position on the Call option to generate income from the option premium. Since the stock is purchased simultaneously with writing (selling) the Call, the strategy is commonly referred to as “buy-write”.
Risk: If the Stock Price falls to zero, the investor loses the entire value of the Stock but retains the premium, since the Call will not be exercised against him. So maximum risk = Stock Price Paid – Call Premium
Upside capped at the Strike price plus the Premium received. So if the Stock rises beyond the Strike price the investor (Call seller) gives up all the gains on the stock.
Reward: Limited to (Call Strike Price – Stock Price paid) + Premium received
Breakeven: Stock Price paid - Premium Received
Example
Mr. A bought NIFTY for Rs 5846.70 on 16 Sept 2010 and simultaneously sells a Call option at an strike price of Rs 6000. Which means Mr. A does not think that the price of NIFTY will rise above Rs. 6000. However, incase it rises above Rs. 6000, Mr. A does not mind getting exercised at that price and exiting the stock at Rs. 6000 (TARGET SELL PRICE = 2.62% return on the NIFTY purchase price). Mr. A receives a premium of Rs 18 for selling the Call.
Thus net outflow to Mr. A is (Rs. 5846.70 – Rs. 18) = Rs. 5828.70. He reduces the cost of buying the NIFTY by this strategy. If the stock price stays at or below Rs. 6000, the Call option will not get exercised and Mr. A can retain the Rs. 18 premium, which is an extra income.
If the stock price goes above Rs 6000, the Call option will get exercised by the Call
buyer. The entire position will work like this :
Strategy : Buy Stock + Sell Call Option
Mr. A buys the NIFTY Market Price (Rs.) 5846.70
Call Options Strike Price (Rs.) 6000
Mr. A receives Premium (Rs.) 18
Break Even Point (Rs.) (Stock Price paid - Premium Received) 5828.70.
Example :
1) The price of NIFTY stays at or below Rs. 6000. The Call buyer will not exercise the Call Option. Mr. A will keep the premium of Rs. 18. This is an income for him. So if the stock has moved from Rs. 5846.70 (purchase price) to Rs. 5946.70, Mr. A makes Rs. 118/- [Rs. 5946.70 – Rs. 5846.70 + Rs. 18 (Premium)] = An additional Rs. 18, because of the Call sold.
2) Suppose the price of NIFTY moves to Rs. 6100, then the Call Buyer will exercise the Call Option and Mr. A will have to pay him Rs. 100 (loss on exercise of the Call Option). What would Mr. A do and what will be his pay – off?
a) Sell the NIFTY Long Position(5846.70) in the market at : Rs. 6100
b) Pay Rs. 100 to the Call Options buyer : - Rs. 100
c) Pay Off (a – b) received : Rs. 6000 (This was Mr. A’s target price)
d) Premium received on Selling Call Option : Rs. 18
e) Net payment (c + d) received by Mr. A : Rs. 6018
f) Purchase price of NIFTY. : Rs.5846.70
g) Net profit : Rs. 6018 – Rs. 5846.70 = Rs. 171.30
h) Return (%) : (Rs. 6018 – Rs. 5846.70) * 100 /5846.70 = 2.92% (which is more than the target return of 2.62%).
STRATEGY 15. BULL CALL SPREAD STRATEGY: BUY ITM* CALL OPTION + SELL OTM* CALL OPTION
*IN-THE- MONEY
*OUT-OF-THE MONEY
A bull call spread is constructed by buying an in-the-money (ITM) call option, and selling another out-of-the-money (OTM) call option. Often the call with the lower strike price will be in-the-money while the Call with the higher strike price is out-of-the-money. Both calls must have the same underlying security and expiration month.
The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish, because the investor will make a profit only when the stock price / index rises. If the stock price falls to the lower (bought) strike, the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike, the investor makes the maximum profit. Let us try and understand this with an example.
When to Use: Investor is moderately bullish.
Risk: Limited to any initial premium paid in establishing the position. Maximum loss
occurs where the underlying falls to the level of the lower strike or below.
Reward: Limited to the difference between the two strikes minus net premium cost. Maximum profit occurs where the underlying rises to the level of the higher strike or above
Break-Even-Point (BEP): Strike Price of Purchased call + Net Debit Paid
Example:
Current NIFTY is at 5846.70 on 16 Sept 2010. Mr. XYZ buys a Nifty Call with a Strike price Rs. 5700 at a premium of Rs. 173 and he sells a Nifty Call option with a strike price Rs. 6000 at a premium of Rs. 18. The net debit here is Rs. 155 which is also his maximum loss.
Strategy : Buy a Call with a lower strike (ITM) + Sell a Call with a higher strike (OTM)
Nifty index Current Value 5846.70
Buy ITM Call Option Strike Price (Rs.) 5700
Mr. XYZ Pays Premium (Rs.) 173
Sell OTM Call Option
Strike Price (Rs.) 6000
Mr. XYZ Receives Premium (Rs.) 18
Net Premium Paid (Rs.) 155
Break Even Point (Rs.) Strike Price of Purchased call + Net Debit Paid : 5855
STRATEGY 17. BULL PUT SPREAD STRATEGY: SELL OTM* PUT OPTION + BUY PUT OPTION WITH LOWER STRIKE
*OUT-OF-THE MONEY
A bull put spread can be profitable when the stock / index is either range bound or rising. The concept is to protect the downside of a Put sold by buying a lower strike Put, which acts as an insurance for the Put sold. The lower strike Put purchased is further OTM than the higher strike Put sold ensuring that the investor receives a net credit, because the Put purchased (further OTM) is cheaper than the Put sold. This strategy is equivalent to the Bull Call Spread but is done to earn a net credit (premium) and collect an income.
If the stock / index rises, both Puts expire worthless and the investor can retain the
Premium. If the stock / index falls, then the investor’s breakeven is the higher strike less the net credit received. Provided the stock remains above that level, the investor makes a profit. Otherwise he could make a loss. The maximum loss is the difference in strikes less the net credit received. This strategy should be adopted when the stock / index trend is upward or range bound. Let us understand this with an example.
When to Use: When the investor is moderately bullish.
Risk: Limited. Maximum loss occurs where the underlying falls to the level of the lower strike or below
Reward: Limited to the net premium credit. Maximum profit occurs where underlying rises to the level of the higher strike or above.
Breakeven: Strike Price of Short Put - Net Premium Received
Example:
Mr. XYZ sells a Nifty Put option with a strike price of Rs. 5700 at a premium of Rs. 30 and buys a further OTM Nifty Put option with a strike price Rs. 5500 at a premium of Rs. 11.45 when the Current NIFTY is at 5846.70., with both options expiring on 30th Sept 2010.
Strategy : Sell a OTM Put + Buy a Put with lower strike
Nifty Index Current Value 5846.70
Sell Put Option Strike Price (Rs.) 5700
Mr. XYZ Receives Premium (Rs.) 30
Buy Put Option Strike Price (Rs.) 5500
Mr. XYZ Pays Premium (Rs.) 11.45
Net Premium Received (Rs.) (30-11.45) = 18.55
Break Even Point (Rs.) Strike Price of Short Put - Net Premium Received 5681.45
The strategy earns a net income for the investor as well as limits the downside risk of a Put sold.
WHEN NIFTY IS CONSERVATIVELY BEARISH - STRATEGY 6: SYNTHETIC LONG PUT OR PROTECTIVE CALL
STRATEGY 6 : PROTECTIVE CALL / SYNTHETIC LONG PUT: SHORT STOCK + BUY OTM* CALL
*OUT-OF-THE MONEY
This is a strategy wherein an investor has gone short on a stock and buys a call to hedge. This is an opposite of Synthetic Call (Strategy 3). An investor shorts a stock and buys an ATM or slightly OTM Call. The net effect of this is that the investor creates a pay-off like a Long Put, but instead of having a net debit (paying premium) for a Long Put, he creates a net credit (receives money on shorting the stock). In case the stock price falls the investor gains in the downward fall in the price. However, incase there is an unexpected rise in the price of the stock the loss is limited. The pay-off from the Long Call will increase thereby compensating for the loss in value of the short stock position. This strategy hedges the upside in the stock position while retaining downside profit potential.
When to Use: If the investor is of the view that the markets will go down (bearish) but wants to protect against any unexpected rise in the price of the stock.
Risk: Limited. Maximum Risk is Call Strike Price – Stock Price + Premium
Reward: Maximum is Stock Price – Call Premium
Breakeven: Stock Price – Call Premium
Example :
Suppose NIFTY. is trading at Rs. 5846.70 in Sept 2010. An investor Mr. A buys a Rs 5900 call for Rs. 45.95 while shorting the stock at Rs. 5846.70. The net credit to the investor is Rs. 5800.75 (Rs. 5846.70 – Rs. 45.95).
Strategy : Short Stock + Buy Call Option
Sells NIFTY (Mr. A receives) Current Market Price (Rs.) 5846.70
Buys Call Strike Price (Rs.) 5900
Mr. A pays Premium (Rs.) 45.95
Break Even Point (Rs.) (Stock Price – Call Premium) 5800.75
Wednesday, September 15, 2010
WHEN NIFTY IS CONSERVATIVELY BULLISH - STRATEGY 5: SYNTHETIC LONG CALL & STRATEGY 10: COLLOR
STRATEGY 5 : SYNTHETIC LONG CALL: BUY STOCK + BUY OTM* PUT
*OUT-OF- THE MONEY
In this strategy, we purchase a stock since we feel bullish about it. But what if the price of the stock went down. You wish you had some insurance against the price fall. So buy a Put on the stock. This gives you the right to sell the stock at a certain price which is the strike price. The strike price can be the price at which you bought the stock (ATM strike price) or slightly below (OTM strike price).
In case the price of the stock rises you get the full benefit of the price rise. In case the price of the stock falls, exercise the Put Option (remember Put is a right to sell). You have capped your loss in this manner because the Put option stops your further losses. It is a strategy with a limited loss and (after subtracting the Put premium) unlimited profit (from the stock price rise). The result of this strategy looks like a Call Option Buy strategy and therefore is called a Synthetic Call!
But the strategy is not Buy Call Option. Here you have taken an exposure to an underlying stock with the aim of holding it and reaping the benefits of price rise, dividends, bonus rights etc. and at the same time insuring against an adverse price movement. In simple buying of a Call Option, there is no underlying position in the stock but is entered into only to take advantage of price movement in the underlying stock.
When to use: When ownership is desired of stock yet investor is concerned about near-term downside risk. The outlook is conservatively bullish.
Risk: Losses limited to Stock price + Put Premium – Put Strike price
Reward: Profit potential is unlimited.
Break-even Point: Put Strike Price + Put Premium + Stock Price – Put Strike Price
Example
Mr. XYZ is bullish about NIFTY/ STOCK. He buys NIFTY/ STOCK. at current market price of Rs. 5861.50 on 15th sept 2010. To protect against fall in the price of NIFTY/STOCK. (his risk), he buys an NIFTY/STOCK. Put option with a strike price Rs. 5800 (OTM) at a premium of Rs. 56.90 expiring on 30th sept 2010.
Strategy : Buy Stock + Buy Put Option
Buy Stock (Mr. XYZ pays) Current Market Price of NIFTY. (Rs.) 5861.50
Buy Put with Strike Price of 5800 @ Premium (Rs.) 56.90
Break Even Point (Rs.) (Put Strike Price + Put Premium + Stock Price – Put Strike Price)* 5918.4
* Break Even is from the point of view of Mr. XYZ. He has to recover the cost of the Put Option purchase price + the stock price to break even.
ANALYSIS: This is a low risk strategy. This is a strategy which limits the loss in case of fall in market but the potential profit remains unlimited when the stock price rises. A good strategy when you buy a stock for medium or long term, with the aim of protecting any downside risk. The pay-off resembles a Call Option buy and is therefore called as Synthetic Long Call.
STRATEGY 10. COLLAR: BUY STOCK + BUY ATM* PUT + SELL OTM* CALL
*OUT-OF- THE MONEY
*IN-THE MONEY
A Collar is similar to Covered Call (Strategy 6) but involves another leg – buying a Put tov insure against the fall in the price of the stock. It is a Covered Call with a limited risk. So a Collar is buying a stock, insuring against the downside by buying a Put and then financing (partly) the Put by selling a Call. The put generally is ATM and the call is OTM having the same expiration month and must be equal in number of shares. This is a low risk strategy since the Put prevents downside risk. However, do not expect unlimited rewards since the Call prevents that. It is a strategy to be adopted when the investor is conservatively bullish. The following example should make Collar easier to understand.
When to Use: The collar is a good strategy to use if the investor is writing covered calls to earn premiums but wishes to protect himself from an unexpected sharp drop in the price of the underlying security.
Risk: Limited
Reward: Limited
Breakeven: Purchase Price of Underlying – Call Premium + Put Premium
Example
Suppose an investor Mr. A buys or is holding NIFTY. currently trading at Rs. 5861.50. He decides to establish a collar by writing a Call of strike price Rs. 6000 for Rs. 22.65 while simultaneously purchasing a Rs. 5800 strike price Put for Rs. 56.90. Since he pays Rs. 5861.50 for the NIFTY., another Rs. 56.90 for the Put but receives Rs. 22.65 for selling the Call option, his total investment is Rs. 5895.75.
Strategy : Buy Stock + Buy Put + Sell Call
NIFTY Current Market Price (Rs.) 5861.50
Sell Call Option Strike Price (Rs.) 6000
Mr. A Receives Premium (Rs.) 22.65
Buy Put Option Strike Price (Rs.) 5800
Mr. A Pays Premium (Rs.) 56.90
Break Even Point (Rs.) 5895.75
WHEN NIFTY IS BEARISH - STRATEGY 3: LONG PUT
STRATEGY 3 : LONG PUT: BUY OTM* PUT
*OUT-OF-THE MONEY
Buying a Put is the opposite of buying a Call. When you buy a Call you are bullish about the stock / index. When an investor is bearish, he can buy a Put option. A Put Option gives the buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and thereby limit his risk.
A long Put is a
Bearish strategy. To
take advantage of a
falling market an
investor can buy Put
options.
Example:
Mr. XYZ is bearish on Nifty on 15th sept 2010, when the
Nifty is at 5861.50. He buys a Put option with a strike
price Rs. 5800 at a premium of Rs. 56.90, expiring on
30th sept 2010. If the Nifty goes below 5743.10, Mr. XYZ will
make a profit on exercising the option. In case the
Nifty rises above 5800, he can forego the option (it
will expire worthless) with a maximum loss of the
premium.
When to use:
Investor is bearish
about the stock /
index.
Risk: Limited to the
amount of Premium
paid. (Maximum loss if
stock / index expires
at or above the option
strike price).
Reward: Unlimited
Break-even Point:
Stock Price - Premium.
Strategy : Buy Put Option
Current Nifty index 5861.50
Put Option Strike Price (Rs.) 5800
Mr. XYZ Pays Premium (Rs.) 56.90
Break Even Point (Rs.)
(Strike Price - Premium) 5743.10
ANALYSIS: A bearish investor can profit from declining stock price by buying Puts. He
limits his risk to the amount of premium paid but his profit potential remains unlimited. This
is one of the widely used strategy when an investor is bearish.
WHEN NIFTY IS BULLISH - STRATEGY 9: LONG COMBO
STRATEGY 9 : LONG COMBO : SELL OTM* PUT + BUY OTM* CALL
*OUT-OF- THE MONEY
A Long Combo is a Bullish strategy. If an investor is expecting the price of a stock to move up he can do a Long Combo strategy. It involves selling an OTM (lower strike) Put and buying an OTM (higher strike) Call. This strategy simulates the action of buying a stock (or a futures) but at a fraction of the stock price. It is an inexpensive trade, similar in pay-off to Long Stock, except there is a gap between the strikes . As the stock price rises the strategy starts making profits. Let us try and understand Long Combo with an example.
When to Use: Investor is Bullish on the stock/INDEX.
Risk: Unlimited (Lower Strike + net debit)
Reward: Unlimited
Breakeven : Higher strike + net debit
Example:
A NIFTY. is trading at Rs. 5861.50. Mr. XYZ is bullish on the NIFTY. But does not want to invest 5861.50. He does a Long Combo. He sells a Put option with a strike price Rs. 5700 at a premium of Rs. 34 and buys a Call Option with a strike price of Rs. 5900 at a premium of Rs. 59. The net cost of the strategy (net debit) is Rs. 25.
Strategy : Sell a Put + Buy a Call
Current NIFTY Index (Rs.) 5861.50
Sells Put Strike Price (Rs.) 5700
Mr. XYZ receives Premium (Rs.) 34
Buys Call Strike Price (Rs.) 5900
Mr. XYZ pays Premium (Rs.) 59
Net Debit (Rs.) 25
Break Even Point (Rs.) (Higher Strike + Net Debit) Rs. 5925
For a small investment of Re. 25 (net debit), the returns can be very high in a Long Combo, but only if the stock/ index moves up. Otherwise the potential losses can also be high.
Tuesday, September 14, 2010
WHEN NIFTY IS VERY BEARISH - STRATEGY 2: SHORT CALL
STRATEGY 2 : SHORT CALL: SELL ITM* CALL
*IN-THE- MONEY
When you buy a Call you are hoping that the underlying stock / index would rise. When you expect the underlying stock / index to fall you do the opposite. When an investor is very bearish about a stock / index and expects the prices to fall, he can sell Call options. This position offers limited profit potential and the possibility of large losses on big advances in underlying prices. Although easy to execute it is a risky strategy since the seller of the Call is exposed to unlimited risk.
A Call option means an Option to buy. Buying a Call option means an investor expects the underlying price of a stock / index to rise in future. Selling a Call option is just the opposite of buying a Call option. Here the seller of the option feels the underlying price of a stock / index is set to fall in the future.
When to use: Investor is very aggressive and he is very bearish about the stock / index.
Risk: Unlimited
Reward: Limited to the amount of premium
Break-even Point: Strike Price + Premium
Example:
Mr. XYZ is bearish about Nifty and expects it to fall. He sells a Call option with a strike price of Rs.5500 at a premium of Rs. 401.90 of Nov 2011 expiry, when the current Nifty is at 5812. If the Nifty stays at 5500 or below, the Call option will not be exercised by the buyer of the Call and Mr. XYZ can retain the entire premium of Rs. 401.90.
Strategy : Sell Call Option
Current Nifty index 5812
Call Option Strike Price (Rs.) 5500 of Nov 2011 expiry
Mr. XYZ receives Premium (Rs.) 401.90
Break Even Point (Rs.) (Strike Price + Premium)* 5901.9
* Breakeven Point is from the point of Call Option Buyer.
ANALYSIS: This strategy is used when an investor is very aggressive and has a strong
expectation of a price fall (and certainly not a price rise). This is a risky strategy since as the stock price / index rises, the short call loses money more and more quickly and losses can be significant if the stock price / index falls below the strike price. Since the investor does not own the underlying stock that he is shorting this strategy is also called Short Naked Call.
WHEN NIFTY IS VERY BULLISH - STRATEGY 1: LONG CALL & STRATEGY 4: SHORT PUT
STRATEGY 1 : LONG CALL (BUY OTM* CALL)
*OUT-OF- THE MONEY
For aggressive investors who are very bullish about the prospects for a stock / index, buying calls can be an excellent way to capture the upside potential with limited downside risk.
Buying a call is the most basic of all options strategies. It constitutes the first options trade for someone already familiar with buying / selling stocks and would now want to trade options.
Buying a call is an easy strategy to understand. When you buy it means you are bullish. Buying a Call means you are very bullish and expect the underlying stock / index to rise in future.
When to Use: Investor is very bullish on the stock / index.
Risk: Limited to the Premium. (Maximum loss if market expires at or below the option strike price).
Reward: Unlimited
Breakeven: Strike Price + Premium
Example
Mr. XYZ is bullish on Nifty on 14th sept, when the Nifty is at 5812.00. He buys a call option with a strike price of Rs. 5900 at a premium of Rs. 36.40, expiring on 30th Spet. If the Nifty goes above 5936.40, Mr. XYZ will make a net profit (after deducting the premium) on exercising the option. In case the Nifty stays at or falls below 5900, he can forego the option (it will expire worthless) with a maximum loss of the premium.
Strategy : Buy Call Option
Current Nifty index 5812
Call Option Strike Price (Rs.) 5900
Mr. XYZ Pays Premium (Rs.) 36.40
Break Even Point (Rs.) (Strike Price + Premium) 5936.40.
ANALYSIS: This strategy limits the downside risk to the extent of premium paid by Mr.
XYZ (Rs. 36.40). But the potential return is unlimited in case of rise in Nifty. A long call
option is the simplest way to benefit if you believe that the market will make an upward
move and is the most common choice among first time investors in Options. As the stock
price / index rises the long Call moves into profit more and more quickly.
STRATEGY 4 : SHORT PUT (SELL OTM* PUT)
*OUT -OF- THE MONEY
Selling a Put is opposite of buying a Put. An investor buys Put when he is bearish on a
stock. An investor Sells Put when he is Bullish about the stock – expects the stock price to rise or stay sideways at the minimum.
When you sell a Put, you earn a Premium (from the buyer of the Put). You have sold someone the right to sell you the stock at the strike price. If the stock price increases beyond the strike price, the short put position will make a profit for the seller by the amount of the premium, since the buyer will not exercise the Put option and the Put seller can retain the Premium (which is his maximum profit). But, if the stock price decreases below the strike price, by more than the amount of the premium, the Put seller will lose money. The potential loss being unlimited (until the stock price fall to zero).
When to Use: Investor is very Bullish on the stock / index. The main idea is to make a short term income.
Risk: Put Strike Price – Put Premium.
Reward: Limited to the amount of Premium received.
Breakeven: Put Strike Price - Premium
Example
Mr. XYZ is bullish on Nifty when it is at 5812 on 14th sept 2010. He sells a Put option with a strike price of Rs. 5700 at a premium of Rs. 41.35 expiring on 30th sept 2010. If the Nifty index stays above 5700, he will gain the amount of premium as the Put buyer won’t exercise his option. In case the Nifty falls below 5700, Put buyer will exercise the option and the Mr. XYZ will start losing money. If the Nifty falls below 5658.65, which is the breakeven point, Mr. XYZ will lose the premium and more depending on the extent of the fall in Nifty.
Strategy : Sell Put Option
Current Nifty index 5812
Put Option Strike Price (Rs.) 5700
Mr. XYZ receives Premium (Rs.) 41.35
Break Even Point (Rs.) (Strike Price - Premium)* 5658.65
* Breakeven Point is from the point of Put Option Buyer.
ANALYSIS: Selling Puts can lead to regular income in a rising or range bound markets. But it should be done carefully since the potential losses can be significant in case the price of the stock / index falls. This strategy can be considered as an income generating strategy.
OPTION TRADING STRATEGIES ON THE BASIS OF NIFTY
Option Trading Strategies
There are 22 trading strategies in option trading according to different market condition. These are as follows:
Sr. No. Name.
1 Long Call
1 Long Call
2 Short Call
3 Long Put
4 Short Put
5 Synthetic Long Call
6 Synthetic Long Put
7 Covered Call
8 Covered Put
9 Long Combo
10 Collar
11 Long Straddle
12 Short Straddle
13 Long Strangle
14 Short Strangle
15 Bull Call Spread
16 Bear Call Spread
17 Bull Put Spread
18 Bear Put Spread
19 Long Call Butterfly
20 Short Call Butterfly
21 Long Call Condor
22 Short Call Condor
I will explain each trading strategy that how these are used at which market condition
I will explain each trading strategy that how these are used at which market condition
Basics About NIFTY
S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S&P CNX Nifty is computed using market capitalization weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.History of NIFTY
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialised company focused upon the index as a core product. IISL has a Marketing and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services.Calculation Methodology :
The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria:
Liquidity (Impact Cost)
For inclusion in the index, the security should have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a basket size of Rs. 2 Crores.
Impact cost is cost of executing a transaction in a security in proportion to the weightage of its market capitalisation as against the index market capitalisation at any point of time. This is the percentage mark up suffered while buying / selling the desired quantity of a security compared to its ideal price (best buy + best sell) / 2
Floating Stock
Companies eligible for inclusion in S&P CNX Nifty should have atleast 10% floating stock. For this purpose, floating stock shall mean stocks which are not held by the promoters and associated entities (where identifiable) of such companies.
Others
a) A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligiblity criteria for the index like impact cost, market capitalisation and floating stock, for a 3 month period instead of a 6 month period.
b) Replacement of Stock from the Index:
A stock may be replaced from an index for the following reasons:
i. Compulsory changes like corporate actions, delisting etc. In such a scenario, the stock having largest market capitalization and satisfying other requirements related to liquidity, turnover and free float will be considered for inclusion.
ii. When a better candidate is available in the replacement pool, which can replace the index stock i.e. the stock with the highest market capitalization in the replacement pool has at least twice the market capitalization of the index stock with the lowest market capitalization.
With respect to (2) above, a maximum of 10% of the index size (number of stocks in the index) may be changed in a calendar year. Changes carried out for (2) above are irrespective of changes, if any, carried out for (1) above.
Constituents of NIFTY Company Name | Industry | Scrip Name |
|---|---|---|
| ABB Ltd. | ELECTRICAL EQUIPMENT | ABB |
| ACC Ltd. | CEMENT AND CEMENT PRODUCTS | ACC |
| Ambuja Cements Ltd. | CEMENT AND CEMENT PRODUCTS | AMBUJACEM |
| Bharat Heavy Electricals Ltd. | ELECTRICAL EQUIPMENT | BHEL |
| Bharat Petroleum Corporation Ltd. | REFINERIES | BPCL |
| Bharti Airtel Ltd. | TELECOMMUNICATION – SERVICES | BHARTIARTL |
| Cairn Bharat Ltd. | OIL EXPLORATION/PRODUCTION | CAIRN |
| Cipla Ltd. | PHARMACEUTICALS | CIPLA |
| DLF Ltd. | CONSTRUCTION | DLF |
| GAIL (India) Ltd. | GAS | GAIL |
| Grasim Industries Ltd. | CEMENT AND CEMENT PRODUCTS | GRASIM |
| HCL Technologies Ltd. | COMPUTERS – SOFTWARE | HCLTECH |
| HDFC Bank Ltd. | BANKS | HDFCBANK |
| Hero Honda Motors Ltd. | AUTOMOBILES – 2 AND 3 WHEELERS | HEROHONDA |
| Hindalco Industries Ltd. | ALUMINIUM | HINDALCO |
| Hindustan Unilever Ltd. | DIVERSIFIED | HINDUNILVR |
| Housing Development Finance Corporation Ltd. | FINANCE – HOUSING | HDFC |
| I T C Ltd. | CIGARETTES | ITC |
| ICICI Bank Ltd. | BANKS | ICICIBANK |
| Idea Cellular Ltd. | TELECOMMUNICATION – SERVICES | IDEA |
| Infosys Technologies Ltd. | COMPUTERS – SOFTWARE | INFOSYSTCH |
| Larsen & Toubro Ltd. | ENGINEERING | LT |
| Mahindra & Mahindra Ltd. | AUTOMOBILES – 4 WHEELERS | M&M |
| Maruti Suzuki Bharat Ltd. | AUTOMOBILES – 4 WHEELERS | MARUTI |
| NTPC Ltd. | POWER | NTPC |
| National Aluminium Co. Ltd. | ALUMINIUM | NATIONALUM |
| Oil & Natural Gas Corporation Ltd. | OIL EXPLORATION/PRODUCTION | ONGC |
| Power Grid Corporation of Bharat Ltd. | POWER | POWERGRID |
| Punjab National Bank | BANKS | PNB |
| Ranbaxy Laboratories Ltd. | PHARMACEUTICALS | RANBAXY |
| Reliance Communications Ltd. | TELECOMMUNICATION – SERVICES | RCOM |
| Reliance Industries Ltd. | REFINERIES | RELIANCE |
| Reliance Infrastructure Ltd. | POWER | RELINFRA |
| Reliance Petroleum Ltd. | REFINERIES | RPL |
| Reliance Power Ltd. | POWER | RPOWER |
| Satyam Computer Services Ltd. | COMPUTERS – SOFTWARE | SATYAMCOMP |
| Siemens Ltd. | ELECTRICAL EQUIPMENT | SIEMENS |
| State Bank of India | BANKS | SBIN |
| Steel Authority of Bharat Ltd. | STEEL AND STEEL PRODUCTS | SAIL |
| Sterlite Industries (India) Ltd. | METALS | STER |
| Sun Pharmaceutical Industries Ltd. | PHARMACEUTICALS | SUNPHARMA |
| Suzlon Energy Ltd. | ELECTRICAL EQUIPMENT | SUZLON |
| Tata Communications Ltd. | TELECOMMUNICATION – SERVICES | TATACOMM |
| Tata Consultancy Services Ltd. | COMPUTERS – SOFTWARE | TCS |
| Tata Motors Ltd. | AUTOMOBILES – 4 WHEELERS | TATAMOTORS |
| Tata Power Co. Ltd. | POWER | TATAPOWER |
| Tata Steel Ltd. | STEEL AND STEEL PRODUCTS | TATASTEEL |
| Unitech Ltd. | CONSTRUCTION | UNITECH |
| Wipro Ltd. | COMPUTERS – SOFTWARE | WIPRO |
| Zee Entertainment Enterprises Ltd. | MEDIA & ENTERTAINMENT | ZEEL |
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