Options Trading for Beginners in Tamil

This session is all about the strategies in options trading that too mainly about long calls or naked calls which means buying of call options. This is suitable when your intention of the market view is bullish or very bullish. The risk factor of this strategy is the premium you pay to buy. For instance, if the premium you pay is Rs.100 and the market lot size is 50 then the total amount is Rs.5000. When the market goes down even to zero, then the premium amount is the maximum loss for you. When the market goes up, as expected the Nifty value goes above 400 points, then your premium travels along with this providing you maximum returns. The advantage of this strategy is that you can pay only a minimum margin and the disadvantage is that the time decay. When the market goes up, or stays neutral, or goes down, the time value in the extrinsic value will be minimum and your premium gets zero. You would experience a loss when the market is neutral or bearish. 

Choosing the Strike
The strike involves three money such as at-the-money (ATM), out-of-the-money (OTM), and in-the-money (ITM). The best strike for a call option is in-the-money. This is because, in-the-money, the Greek’s calculations like delta, Gama, volatile, and Rio will be positive. The only thing which is negative in this strategy is that the time decay which is theta. When time gets eroded then your premium gets less. The most important part of this strategy is choosing your strike. It is best to choose the in-the-money in-the-call option.  You can trade daily or weekly or monthly. On comparing the weekly expiry, you can trade in a relaxed manner in case of the monthly expiry. As you have bought the premium by paying the full amount, it would become a position of yours. So that you can wait till the expiry in case you don’t have a profit in intraday.

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Example for long call
This strategy can be explained with examples. Now let us have a look at the screen. The nifty future price is about 17848.8 which is around 17850. This is the at-the-money strike. When you buy a premium at-the-money as 17850 then your premium would be 117.2. In-the-money as 17750, the premium would be even higher as 176. Thus the premium differs from the strike value. The advantage of in-the-money is that the profit probability would be higher. The Greek’s calculation would be as the delta value has a sensitive value as 63.18. In at-the-money or out-of-the-money, the delta value gets even lesser. Then it will be less active. Even though the nifty moves, your premium would change much out-of-the-money, have a mild change in at-the-money, and would be very active in at-the-money. This is the main advantage of the delta. The maximum loss would be the premium amount of about 176. When the call option is bought at the strike value of about 17950 which is out-of-the-money then the probability of profit percentage is less than 31.06%. 

According to this strategy, the market value is 17850, and the expected value is 17960. The breakevens are obtained when the value crosses the 17950 and the premium 75. The profit would be obtained after the breakeven point which is 18026. When the market closes at 17950 then the time erodes and the premium becomes zero. When the market closes at at-the-money or out-of-the-money then the premium would get zero. The premium stays only at in-the-money. Hence this strategy has to be attended carefully.

Short Call or Sell Call
The next thing about the strategy is the selling of the call option which is also known as call writing. This is suitable when the market view is a downtrend or neutral. It has a maximum risk. When the market goes up, your premium i.e, 100 increases moving to in-the-money causing risk. Hence it should be chosen only when the market is at a downtrend or neutral. The premium you buy is the reward here. Even when the maximum profit is zero, you would get a profit of premium amount i.e, 100. The reward would be limited and the success probability in call writing is more. The major benefit of this strategy is the time decay, which is when the time value decreases then the extrinsic value will be your benefit. It does not have any margin benefit which is the major disadvantage here. When you sell for Rs.100, you must pay the nifty future margin, say, around 1,10,000 to obtain the position.

Example for Short Call
You can make high profits in call writing which can be understood clearly using some examples. Another important factor in choosing the strike. you can write the call option only on at-the-money and out-of-the-money. You should not prefer the in-the-money for writing call option because the delta value will be sensitive. Only on out-of-the-money, the delta value would be less. The delta value is nothing but when the market at the money goes down, say, as the nifty goes down by 50 points. The price fluctuation at the money would be about  Rs.5. at out-of-the-money, the nifty would react only to Rs.2, and in-the-money it would react to Rs.50. You must focus on call writing only on out-of-the-money.

Let us have a look at the screen to know about selling a call. When you sell the call option with an out-of-the-money strike value of 17950 then you would obtain the premium of 75.45 which would be credited to your ledger. When the call ends you would get to know about the actual ledger. When I buy a call the premium would be debited from my ledger and on selling the call it would be credited. This may lead to some confusion which could be overcome by regular trading. When I expect that the call would not move ahead of 17950 and I have sold the call. The profit probability is 68.83%. When you buy, you would get only 20 or 30%. On selling deeply with more out-of-the-money, you would get more profit probability. It is wiser to sell out-of-the-money as the delta value is less here. The maximum profit is the premium sold. When the strike value moves more than 18800 then the risk would be more. When it is sold at out-of-the-money 17950 even if the current value is 17850 then the premium would get zero. Even when the call ends at 17850 there will not be any time value in the extrinsic value leading to zero premium. There would be a profit in both cases of 17950 or at 17850. You would acquire loss only on in-the-money. When the value moves to 18200 then the 250 gets into the in-the-money. The winning probability is more and the only drawback is the margin. You have to pay the full margin i.e, 99674 to initiate the trade. If you have more funds than writing would be the best choice. 

This is a reference screen, I had expected a market down, I didn’t buy the put option but sold the call option at 107.05 and covered at 51.55. The profit is the MTM which is 5500. You need an excess margin of around 6,00,000 to make these transactions. But you would get a high profit even when the market stays. The market was down as I had expected so I have booked a profit and the profit probability is high in selling so I have sold the call option. The technical analysis of these transactions will be explained in future sessions.

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