Skip to main content

Introduction to Options

There are two fruits, say banana and apple, in a basket. If you were given an OPTION to take one of the fruit, which one will you take?
Notice the word OPTION in the above sentence. You are given a choice between two fruits.

Say, now a security is at Rs.5000/-. You think it will go to Rs.5500/- in a month.
If you have Rs.20000/- for trading, you can buy only 4 now and sell it after a month. If you opt for OPTIONS, you can buy at a lesser price and gain more. For Rs.20000, you could get an option for buying 80 (approx.) securities (each Rs.5000/-).

CASE I:
-----------
After a month, if the security price is Rs.5500/-,
You would gain => (5500 - 5000) * 80 = 40000.
But you have already given 20000 to get the option.

So, your profit would be Rs. 20000/- => 100% return in just a month :-)


CASE II:
------------
After a month, if the security price is Rs.4000/-
you have already spent Rs.20000/- on getting the option.

Total Loss: Rs. 20000/-
(Already spent on getting option. You will not execute this one.)

You will be given an option to execute it. You will execute only in the case of CASE I and not CASE II.

If you are executing the options, you will end up paying brokerages for buying and selling the securities.

Coming to the JARGONS of Options.
------------------------------------------

(1) CALL - Right to buy.
(2) PUT - Right to sell.

If you think, the security is going to go down, you can BUY PUT.
If you think, the security is going to go up, you can BUY CALL.

Let me tell you, the OPTIONS are always riskier. Most of them will be illiquid.
One of the highly liquid instrument is NIFTY Options.

When you BUY CALL, to get out of options before the date of expiry, what should you do?
If your answer was BUY PUT, Please don't try trading options. You should WRITE/SELL CALL.

Brokerages on Options:
------------------------------

Buying/Selling an option - Rs. 100/- or 1% (whichever is higher)
While exercising an option - Intra-day brokerage charges. (vary depending on the customer and brokerage houses.)

The real advantage of OPTIONS, you can gain more from less money. Even 100% Return on Investment is easily possible (Beware, the reverse is also possible :-P)
There is a cap on the downside but there is no cap on the upside.
Labels:

Comments

Post a Comment

Popular posts from this blog

Nokia E51 WLAN Settings

Nokia E51 is a smart phone with almost all the features available in it. It looks really slim and comes in three colors. It has loads of features and highlight of them all is the connection through the Internet through WLAN. You can get a Internet connection from the service provider and ask for the wi-fi router. With the wi-fi router, you can connect to the Internet through various other devices like Laptop, Nokia E51 etc., You will be provided with the password for the WLAN connection and only if you enter the password correctly you will be connected to the Internet through that WLAN. As you may expect, this password will be asked only when you connect to Internet through this WLAN for the very first time. In Laptop/Computer, you have Network settings to identify and modify the settings if wrongly entered. But this is somewhat tricky in case of Nokia E51! In Nokia E51, You have the option of Browse WLAN right at the home page for you. If you have customized for something different, u
10 comments
Read more

Internet not working on laptop - what should you do?

 When the internet is not working, consider looking at the available networks and see if you can switch to any other internet that would work Further, troubleshoot by restarting the modem and the laptop once to make sure there are no issues with either of them. If none of those works, consider contacting your interest service provider to help troubleshoot.
Post a Comment
Read more

Treasury bonds Vs high yield savings

 You have some additional cash and are looking for the best place to park to get more money from it? If you answered yes, couple of options that you might be considering could be 1. Treasury bonds 2. High yield savings with bank fixed deposits This is especially in United States.  First let’s look at the commonalities: 1. Both are absolutely safe and assured 2. The capital preservation is assured Now, let’s look at when we should look for which one 1. If you could need this money anytime soon (within the next six months to a year or lesser), great option is to choose high yield savings. One option to consider is PayPal savings (which offer 4%+ APY these days.  2. If you don’t need it immediately and consider ways to get the maximum amount in an assured way, you can consider 15 month fixed deposit in certain banks, which offer over 4.65% APY for 15 months. 3. If you think the inflation is going to remain high and want to save with the government, you can choose the treasury bonds as an
Post a Comment
Read more