Why Trade In Options:
Well before trading in options one must ask sir why I have to trade in options instead of stocks?
Answer:- lets take an example if I buy icici bank share at 1000 rupee there are two options that either it will go up or down if it will go up its good but if it will go down say 900 rupees I just have to hold or wait for another one month or one year to cover up your loss. Now take one more example I buy 250 icici shares at 1000 and also sell 1020 call option 40 and buy 960 put at 20.now if lets say icici bank expires at 1020 .well in that case, we profit+ 20 rupees from share +40 rupees from call option and -20 rupees loss from put option that is overall profit is 40 rupees. or around 3.5% of your investment and also benefit here is that we are also protected downside .this example is just a drop from ocean means there are many other ways also to get profit without risk or with the minimum risk like
· Iron condor
· Calendar spread
· Married put
· Long strangle
· Short strangle
· Protective collar
And much more but these are just tools to help you in the market because the warrior who wins the battle is not the one who has many tools but he is the one who know where and when to use which tool.
What is hedging?
Well let’s say you(A) and your friend(B) are watching a cricket match between India and Pakistan .you say India will win and your friend say Pakistan will win now you both bet on it you say if India wins A give B 1000 rupees and if it will loose your friend(B) give 1000 rupees to A now in mean time one more friend C came which is a big fan of team India he said if India wins he give you 1500 rupees and if loose you give C 1000 rupees he is giving you 1500 rupees instead of 1000 because he is quite confident that India will definitely win now if India wins you loose 1000 rupees in the second bet and gain 1000 in the first bet.
And if Pakistan wins you loose 1000 in the first bet and gains 1500 in the second bet in all you gain 500 if Pakistan wins and loose nothing if India wins this is a just lame example of hedging but in the stock market, we will do it for options which are perfectly legal.
NOTE:- we do not support betting as its illegal in India the above example is only used for an educational purpose.
FREE TUTORIAL ON CALENDER SPREAD
I am going to narrate you an options strategy calendar spread the beauty of this strategy is that risk and reward both are limited in it but there are 90% chances where you win in this trade and rest 10% risk is limited now coming to strategy
Step 1:- we have to sell current month calls and puts.
Step2:- we have to buy another month calls and puts of the same strike
Let’s understand it better with the help of simple example:-
if NIFTY is trading at 6200 in January well i sell nifty 6500 call January at 30 also sell 5900 put at 25 and also I buy 6500 nifty calls February at 60 and also 5900 put February at 51 now trick here is that current month options loose premium more early as there expiry is near .now lets take all possibilities we will be in profit if nifty expires between range 5850 to 6550 the graph of which will look like this
let’s assume NIFTY expires at 5900
well profit from 6500 calls and 5900 put January +30+25=+55
loss from 6500 call February which is at 15 now(- 60+15)=-45
profit from 5900 put which is at 100 now is 100-51=+49
overall profit=+55-45+49=+59 or 59*50=+2950rupees on a capital of 50000 rupees which is a return of6%
Let’s assume nifty at 6100 (means between 5900 and 6200)
profit from 6500 and 5900 put January=+55
loss from 6500 and 5900 put which are now at 40 and 38
111-40-38=+33 or 33*50=1650which is around3.3%return
Let’s assume niftily expires at 5800
Then loss on 5900 put an which is at -100 now is
Profit from 6500 calls January sell = +30
Profit from nifty 5900 Feb put which is now at125 is
Loss on 6500 calls Feb which is now at 10 is
Overall loss=-75+30+74-50=-21or -1050 rupees
We also have the procedure to convert this loss into profit by adjustments after which you would have profit range from 5600 to 6800 means you have a range of 1200 points for profit which is told to our paid members and your strategy profit graph will look like this:
for any doubt please put your query in comments or write us at firstname.lastname@example.org