This article deals with a thinking of defining a strategy for writing an option contract just before one week to option expiry.
This is an option strategy I wish to discuss and elaborate.
May be it has some pitfalls but surely some thinking can be done?
With in a week to option expiry time frame
(for example for August 2013 option expiry date is 29th August 2013.
Between 22nd August 2013 to 29th August 2013 we can take a week's time for calculation).
Usually around the last week there comes up a certain amount of volatility which is higher than normal volatility The reason being options contracts getting wound, new options contracts getting written so this probably gives more volatility to the market.
During this time we see how the prices move up :
We take a stock Bank of Baroda for example:
Say on 22nd August the spot price of Bank of Baroda was around Rs. 450. On the same day the Put option of Rs.420 was priced around Rs 5.35 and Call option of 500 was priced around 4.40.
A few days later that is today(26th August 2013- 4 calendar days later precisely)
The put option of Rs. 420 is priced around Re 1 and 500 call option is priced around 3 Rs. when the stock spot price is 470 today.
Thus if we have written a put option of 420 and call option of 500 on 22nd August (exactly one week before option expiry date) and squared off the position 4 days later (its exactly 2 working days- Friday and Monday) for writing this option we would have collected a premium of 5.35+4.40-1.00-2.5 = 9.95-3.5 = 6.45 which amounts for 500 stock approximately Rs 3250/-
Assuming brokerage paid is 250 Rs. for writing the options and winding up the options written we get a net profit of Rs.3000/-
Good gain for 4 days is not it ?
cheers
zilebi
This is an option strategy I wish to discuss and elaborate.
May be it has some pitfalls but surely some thinking can be done?
With in a week to option expiry time frame
(for example for August 2013 option expiry date is 29th August 2013.
Between 22nd August 2013 to 29th August 2013 we can take a week's time for calculation).
Usually around the last week there comes up a certain amount of volatility which is higher than normal volatility The reason being options contracts getting wound, new options contracts getting written so this probably gives more volatility to the market.
During this time we see how the prices move up :
We take a stock Bank of Baroda for example:
Say on 22nd August the spot price of Bank of Baroda was around Rs. 450. On the same day the Put option of Rs.420 was priced around Rs 5.35 and Call option of 500 was priced around 4.40.
A few days later that is today(26th August 2013- 4 calendar days later precisely)
The put option of Rs. 420 is priced around Re 1 and 500 call option is priced around 3 Rs. when the stock spot price is 470 today.
Thus if we have written a put option of 420 and call option of 500 on 22nd August (exactly one week before option expiry date) and squared off the position 4 days later (its exactly 2 working days- Friday and Monday) for writing this option we would have collected a premium of 5.35+4.40-1.00-2.5 = 9.95-3.5 = 6.45 which amounts for 500 stock approximately Rs 3250/-
Assuming brokerage paid is 250 Rs. for writing the options and winding up the options written we get a net profit of Rs.3000/-
Good gain for 4 days is not it ?
cheers
zilebi
Put and call is just gambling. of course stock is always volatile
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Put and call if done without a strategy is gambling! A defined strategy has a known risk and reward known at time of writing the option contract.
zilebi
Really 2 spk I v no experience in put and call. Stopped all trading long back.
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