Options Basics terminology:
CE = Call Options
PE = Put Options
Call ~ Long ~ Buy signifies upside.
Put ~ Short ~ Sell signifies downside.
Nifty Mar 9000 CE = Nifty Staying above 9000.
Nifty Mar 9000 PE = Nifty Staying below 9000.
Buying Nifty Mar 9000 CE means you are betting that Nifty will stay above 9000 on the end of trading session of last Thursday of March ~ 30th March.
Selling Nifty Mar 9000 CE means you are betting that Nifty will stay below 9000 on the end of trading session of last Thursday of March ~ 30th March.
Buying Nifty Mar 9000 PE means you are betting that Nifty will stay below 9000 on the end of trading session of last Thursday of March ~ 30th March.
Selling Nifty Mar 9000 PE means you are betting that Nifty will stay above 9000 on the end of trading session of last Thursday of March ~ 30th March.
So, fundamentally speaking –
Buy Nifty Mar 9000 CE = Sell Nifty Mar 9000 PE
Sell Nifty Mar 9000 CE = Buy Nifty Mar 9000 PE
Options are amazing! Instead of betting that NIFTY will go up tomorrow and doing something; you can bet NIFTY will stay between this range and that range till this August.
Predicting NIFTY will stay in x and y range in tomorrow is comparatively easy than predicting it will stay in that range in the time of expiry right because there will be dozen of movements before that.
So if someone else bet on the same thing you do after few days; his chance of winning is always higher than yours and hence to re-balance this options’ value decreases with respect to time towards their expiry. This is called Theta.
Now the first magical fact is betting on range.
I will give you couple of live setups for this month with proper rationale
Sell Suntv Aug 760 PE at 13.5
Supports of Suntv is at 800,780,760.
It’s a high beta stock so beware. If NIFTY crashes it will crash in line with NIFTY. But as long as it stays above (760-11 = 749) you are in profit.
Margin needed – 73,550 INR
Premium received – 13,550 INR
So total effective amount needed to short this option – 73,550 -13,550 = 60,000 INR
Now the second magical fact is you get that amount you can net as maximum profit in the single option sells beforehand and can be used as your margin hence decreasing your effective amount needed to short.
If all goes right then 13,550 INR profit on 60,000 INR employed in this current month.
The third magical fact is due to theta; the value of option will decrease and hence you can exit before the trade or use your profit as your effective stop loss afterwards.
Here goes another setup :
Sell NIFTY August 9800PE at 57.20
Sell NIFTY August 10200CE at 50.25
Initial credit = 50.25+57.20 = 107.45
Downside breakeven is = 9800-107.45 = 9692.55
Upside breakeven is = 10200+107.45 = 10307.45
So as long as NIFTY stays inside 9692.55 and 10307.45 you are in profit.
Isn’t it good and less horrible than taking a directional bet? It will start generating money spot on as long as NIFTY is staying in that range which is huge range.
Here is another good setup:
Let’s say I am bullish on Axis bank. Instead of buying a futures we can sell according to this following setup –
Even if Axis bank stays between 513 and 584 you will be in profit of at least 10,000 INR.
Our highest profit is 78,480 INR and that too will happen if Axis just stays between a ranges of 540–560. That’s a 20 point range!
Guess our employed capital? 426,480.00 -102,480.00 = 324,000.
Similarly if you say I don’t like range of 513 and 584; I need more leg room towards downside; that can be arranged too.
Your highest profit here is 47,700 INR and you attain this if Axis stays between 520 and 560; that’s a 40 point spread of maximum profit.
You will stay in profit as long as Axis bank stays between 500 and 580 before this expiry. But the loss of profits in 500–520 and 560–580 range is drastic.
Guess our employed capital? 417,300.00-95,700.00 = 321,600.00. Lower than previous setup!
As is says – Each trader has his own appetite. What’s yours? 🙂