Options Trading for Beginners in Tamil (Part 2)

This article is all about a premium strategy of buying put options while the market is bearish. When the market is a downtrend or the nifty gets down or bank nifty goes down you can buy the put options. Only one leg or a naked position is taken in this strategy. The risk involved in this strategy is the premium risk. You can buy a premium of Rs.100 and when the market goes down the premium also increases. When the market goes high, the premium becomes zero. Hence the maximum loss is the premium. The rewards are unlimited. As explained, when the market goes down, the premium increases thereby increasing the rewards and returns. The advantage of this strategy is the margin benefit. Since you pay only the premium there will be margin benefits. The risk in this strategy is time decay. Suppose the market didn’t go down or it stays neutral or it goes up, the premium erodes to zero. According to this strategy, strike choosing plays a major role. The strike should be chosen in-the-money. You can even choose a high premium. Some people choose premium to trade while some others choose in-the-money strike. When you choose at-the-money or out-of-the-money, there are certain premium risks involved. You can attempt this in weekly expiry and also in monthly expiry. When you go monthly, you would get much time so that you can take up a position relaxingly.

Long Put
You would get to know much about this strategy through this explanation. Let us have a look at the screen to know about the option chain. The underlying product at which the nifty has closed is 17853.20 based on which the future and options fluctuate. I have taken an expiry date of 30th September. If you have not opened any broking or trading account, you can watch the screen for practice as study material. Once you have opened a broking account you can see this chain through it. The left side would be the chain for call options whereas the right side is for put options. You can consider 17850 as at-the-money. The premium value for in-the-money will be high such as 146.40, 174.05, 211.15 are the last traded price. According to put options, 17800, 17750, 17700, etc are in-the-money with a less premium value. Out-of-the-money has only extrinsic value so the premium is less and in-the-money has both intrinsic and extrinsic value. When you intend that the market gets downtrend, you can buy in the money. For example, for a nifty value of 17900, the premium price is 146.70. When the nifty goes down, the premium would be much more sensitive as compared to out-of-the-money this is because the delta value could be high. when nifty gets down by 200 points, there is a chance for the premium to raise about 200 points. For instance, people would like to choose the strike value 17400 because the premium is 18.20 which is around 20, and gets active when the put options come around 17400. Even though the nifty goes down, it won’t get super active. It would get super active only in the money. So it is better to trade with in-the-money than out-of-the-money.

Example for Long Put
Here is an illustration for you from the opstra options analysis website page. I have chosen options, expiry as 30th September and has a nifty future as 17848. I have chosen the 17850 at-the-money strikes. I have bought the put option with an intention as the market goes down. When the market goes down, there would be an increase in the premium price which is 118. For a lot, I have been given an additional position. There would be an illustration of scrolling down about the closure of position strategy. The probability of success is 36.34%. This is for at-the-money and when you go for out-of-the-money the probability would be less. When you choose far out-of-the-money then the probability would be even less. The estimated margin is 5900. You can initiate with a small margin also. The maximum risk is the margin risk. On coming to market downtrend, when the price goes to 17500 or 17600, you would receive a profit of about 12000. The benefit of this strategy is maximum profit and minimum loss. When you intend to market down, you can use this strategy i.e, the nifty is 17850 and it goes to 17650 then you can attempt this strategy. Even when the market closes at 17850 then the premium and time erode to zero even if it is in-the-money and out-of-the-money. I would show you a position edit. I have modified the price as 17750 so there is less probability of success with less delta value. When you move to out-of-the-money, then the delta value gets decreased even more making it less sensitive. For example, the nifty is 17250, then the premium would be very less which would induce people to buy. When your market didn’t go well in the money, then your premium would be lost. You can buy the premium when you have 568 and the delta value is very less and becomes non-sensitive. When the nifty reduce by 100 points the delta value moves only by 6. According to options trading, choosing a strike is very important. The premium reacts with the market only in-the-money and out-of-the-money or at-the-money won’t react with the market. 

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Short Put
When you have an intention as the market goes up, you can sell the put options. For example, you can sell the premium of about 100. When the nifty goes down by 100 points, then the premium reduces to 90,80, 70, and moves to expiry. When the premium reduces you would obtain the benefits. The maximum benefit for a premium of 100 is zero. When the nifty goes down in a bullish market, causing an increase in the premium value. You must write the put option only in the bullish market. Time decay is a major benefit. There would be an intrinsic and extrinsic value in a premium. Extrinsic value is the time value. Then the time erodes the premium. The main disadvantage is that you have to pay the margin amount. For example, when the margin value is 1,10,000 then you have to pay the entire amount to sell the put options. The success probability of writing would be high. You have to choose out-of-the-money as the first priority to sell and then you can choose at-the-money strike. But you should not choose the money. This is because, the greeks such as delta, volatility would be opposite.

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Example for Short Put
Here is an example of selling a put option. Let us have a look at the screen. When you have a view as the market goes bullish you can write the put options as this makes the premium as profit. The underlying product is 17850. I have chosen options and the expiry of 30th September. I have made the intention as 17850 which would be in at-the-money. The premium is 118. When the market goes bullish at 18000 and closes then the premium goes zero. When it closes at 17850 at the money also the premium goes zero. In case, if the nifty goes down to 17750, then there would be a loss. As the difference is in intrinsic value, it causes loss. Now I would choose an out-of-the-money strike as 17750 with a low premium value but has a high probability of success. according to the strike price, for 17850, 17750 is out-of-the-money. The premium would be 68.15. I have chosen the same strike and on adding the position. Let us have a look at the closure. The probability of success is 68% when the market goes up, the premium goes to zero. The maximum profit is 3.35%. The estimated margin is 1,01639. As I have said earlier, you won’t have any margin benefit and hence you have to pay the entire amount. In case, if nifty goes down by 500 points then the premium can increase up to 680. Since it has maximum risk. It is good to go with margin trading. On writing put options, in out-of-the-money, the Greeks values would be less. On moving out-of-the-money, the delta value would lessen and become insensitive. In the money, the delta value would be high with increasing sensitivity. On taking a lower value as 17500 then the premium would become 25 and the delta value gets reduced even as 14.45. The writing strategy has more profit but you have to pay excess margin. When you can pay a margin amount without hesitation for options writing as a trader then you would have a high success probability. You can expect 8% to 10% every month.