Professional Documents
Culture Documents
By Dhananjayan J,
Investment Consultant,
VD Investment advisors,
Mobile - +919629474080.
Email - dhanan12@yahoo.com.
India
1
Introduction
Options are most often regarded as insurance against the price movements in the
(CALL) or sell (PUT). These options are priced based on the Holy Grail kind of
formulae called ‘Black-Scholes’ model. This logic behind the formulae is based on
current underlying asset price, intrinsic value, time for expiry, volatility, interest
rates and dividend, if any, paid. As the expiry date nears, the option premium
price tends to go down. However such fall happens only at the fag end of the
option period. In between periods, one can watch an interesting fact about the
option premium price. It tends to move along with the value of the underlying
asset. But the spread between the value of underlying assets and the option
premium is wide enough to make huge profit. Investors can benefit from this
spread on the direction of the underlying. In this paper, we are going to discuss
2
Basics of Options
Option - Definition
Option is a right to exercise (but not an obligation) for buying or selling underlying asset
CALL option
Call option is a right to buy an underling asset
PUT option
Put option is a right to sell an underlying asset
Strike price
Price at which an option can be exercised
Expiry period
Date within which the option is to be exercised
American option
An option that can be exercised anytime before or on the expiry date
European option
An option that can be exercised only at the expiry date
Shorting an option
Selling an option which is not owned by the holder. Risk is unlimited here
Selling an option
Selling an option which is owned by the holder. Risk is limited to the extent of loss made in
premium price.
Underlying Asset
It can be market indices, stocks, interest rates, commodities, etc. It should be traded in derivative
futures market.
This paper examines how a trader (not investor) can earn return in just the option
premium price’s direction based on the underlying asset’s price direction. Value of
option premium is much higher than that of underling’s as well its futures!
Underlying asset
In this paper, we use option on NIFTY, an index for Indian equity market calculated
by India Index Services & Products Ltd – a joint venture between the National Stock
Exchange1 & CRISIL Ltd (formerly the Credit Rating Information Services of India
Limited). This comprises of 50 large businesses that are well diversified accounting
for 22 sectors of the Indian economy.
1
www.nseindia.com
3
Contract specification
Lot size – 50
Period – 1, 2 and 3 months
Expiry date –Last Thursday of expiry month
Underlying asset – Nifty Futures
Kind of option - European option
Period under coverage – From 25th June to 9th Sept 2010 – 3 months with 30-Sept-
2010 as expiry.
With this data, we have examined 6 different scenarios in which a trader can take
advantage of the premium price directions to gain a substantial return.
Case 2 – CALL – Buy today and sell tomorrow – in expected bull market
Case 3 – CALL – Buy today – sell tomorrow or 2 days after – in expected strong bull
2
Source data are collected from www.nseindia.com
4
Bear market – PUT option trading strategy
Case 6 – PUT - Buy today – sell tomorrow or 2 days after – in expected strong bear
First, let us list the cash and futures quote of NIFTY as well as PUTS and CALLS.
Currently, NIFTY is trading at 5,640.05 at spot & 5630.55 at futures.
108
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100
99
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0
10
0
0
0
0
0
l-1
l-1
-1
-1
-1
-1
1
l-1
l-1
l-1
p-
n-
ug
ug
ug
ug
Ju
Ju
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-Ju
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Se
-Ju
2-
9-
-A
-A
-A
A
3-
16
23
30
25
6-
13
20
27
Cash-NIFTY FUT-NIFTY
5
-
-
20
40
60
80
100
120
20
40
60
80
100
120
140
160
D D
at at
29 e 29 e
-Ju -Ju
n- n-
10 10
2- 2-
Ju Ju
l-1 l-1
0 0
7- 7-
Ju Ju
l-1 l-1
0 0
12 12
-Ju -Ju
CALL-5300
l-1 l-1
0 0
PUT-5300
15 15
-Ju -Ju
l-1 l-1
0 0
20 20
-Ju -Ju
l-1 l-1
0 0
23 23
CALL-5400
PUT-5400
-Ju -Ju
l-1 l-1
0 0
28 28
-Ju -Ju
l-1 l-1
0 0
2- 2-
A A
ug ug
-1 -1
0
PUT-5500
0
CALL-5500
5- 5-
A A
ug ug
-1 -1
10 0 10 0
-A -A
ug ug
-1 -1
13 0 13 0
-A -A
PUT-5600
ug CALL-5600 ug
-1 -1
0
18 18
-A -A
ug ug
-1 -1
23 0 23 0
-A -A
ug ug
-1 -1
0
PUT-5700
26 26 0
-A -A
CALL-5700
ug ug
-1 -1
31 0 31 0
-A -A
ug ug
-1 -1
0 0
3- 3-
Se Se
FUT-NIFTY
p- p-
10 10
FUT-NIFTY
8- 8-
Se Se
p- p-
10 10
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100
102
104
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108
6
Exercise
We assume a trader buying one option in each strike price namely at 5300, 5400,
5500, 5600 and 5700. So the total investment in any trading day would be ranging
from INR 30,000 to INR 45,000.
NIFTY
Date Open High LTP Gain/(loss) @ LTP Gain/(loss) @ High cash
25 June 2010 32,930.00 36,905.00 32,902.50 -0.1% 12.1% -1.0%
28 June 2010 34,815.00 37,570.00 37,290.00 7.1% 7.9% 1.2%
29 June 2010 34,792.50 37,220.00 31,585.00 -9.2% 7.0% -1.5%
30 June 2010 28,337.50 35,925.00 35,512.50 25.3% 26.8% 1.1%
01 July 2010 30,985.00 31,545.00 30,515.00 -1.5% 1.8% -1.2%
02 July 2010 30,045.00 32,275.00 29,650.00 -1.3% 7.4% -0.3%
05 July 2010 29,087.50 30,890.00 29,707.50 2.1% 6.2% 0.0%
06 July 2010 30,142.50 34,962.50 33,207.50 10.2% 16.0% 1.0%
07 July 2010 35,782.50 35,972.50 29,282.50 -18.2% 0.5% -0.9%
08 July 2010 31,775.00 35,857.50 32,922.50 3.6% 12.8% 1.1%
09 July 2010 32,440.00 37,392.50 35,662.50 9.9% 15.3% 1.0%
12 July 2010 37,292.50 39,417.50 37,135.00 -0.4% 5.7% 0.6%
13 July 2010 36,122.50 40,080.00 38,937.50 7.8% 11.0% 0.3%
14 July 2010 40,757.50 41,945.00 37,567.50 -7.8% 2.9% -0.3%
15 July 2010 37,502.50 39,150.00 37,605.00 0.3% 4.4% -0.1%
16 July 2010 35,015.00 37,962.50 37,815.00 8.0% 8.4% 0.3%
19 July 2010 36,097.50 38,780.00 36,085.00 0.0% 7.4% -0.1%
20 July 2010 37,752.50 38,100.00 32,275.00 -14.5% 0.9% -0.3%
21 July 2010 34,365.00 37,455.00 36,405.00 5.9% 9.0% 0.6%
22 July 2010 34,582.50 41,792.50 40,530.00 17.2% 20.8% 0.8%
23 July 2010 41,650.00 43,032.50 39,940.00 -4.1% 3.3% 0.1%
26 July 2010 39,387.50 40,062.50 37,260.00 -5.4% 1.7% -0.6%
27 July 2010 37,315.00 40,502.50 37,755.00 1.2% 8.5% 0.2%
28 July 2010 37,935.00 38,642.50 33,065.00 -12.8% 1.9% -0.6%
29 July 2010 32,637.50 34,012.50 33,457.50 2.5% 4.2% 0.2%
30 July 2010 31,237.50 31,715.00 26,987.50 -13.6% 1.5% -0.8%
02 August 2010 29,277.50 31,525.00 31,085.00 6.2% 7.7% 1.2%
03 August 2010 31,225.00 31,375.00 29,745.00 -4.7% 0.5% 0.1%
04 August 2010 29,370.00 32,567.50 31,710.00 8.0% 10.9% 0.5%
05 August 2010 31,665.00 34,937.50 31,707.50 0.1% 10.3% -0.4%
06 August 2010 31,475.00 32,992.50 29,850.00 -5.2% 4.8% -0.1%
09 August 2010 28,802.50 33,455.00 32,337.50 12.3% 16.2% 0.9%
10 August 2010 31,277.50 31,760.00 30,085.00 -3.8% 1.5% -0.5%
11 August 2010 29,265.00 30,067.50 23,715.00 -19.0% 2.7% -0.7%
12 August 2010 20,105.00 25,827.50 24,252.50 20.6% 28.5% -0.1%
13 August 2010 24,545.00 29,360.00 26,787.50 9.1% 19.6% 0.7%
16 August 2010 26,427.50 28,227.50 23,222.50 -12.1% 6.8% -0.6%
17 August 2010 23,870.00 25,092.50 23,687.50 -0.8% 5.1% -0.1%
18 August 2010 23,280.00 29,942.50 29,642.50 27.3% 28.6% 1.2%
19 August 2010 29,327.50 35,970.00 34,925.00 19.1% 22.6% 1.1%
7
20 August 2010 33,580.00 35,865.00 34,067.50 1.5% 6.8% -0.2%
23 August 2010 33,820.00 36,670.00 36,027.50 6.5% 8.4% 0.2%
24 August 2010 35,567.50 36,135.00 32,202.50 -9.5% 1.6% -0.7%
25 August 2010 30,832.50 31,522.50 26,780.00 -13.1% 2.2% -0.8%
26 August 2010 27,802.50 28,705.00 25,575.00 -8.0% 3.2% 0.3%
27 August 2010 24,502.50 27,157.50 19,852.50 -19.0% 10.8% -1.3%
30 August 2010 23,707.50 24,480.00 20,197.50 -14.8% 3.3% 0.1%
31 August 2010 17,885.00 18,522.50 16,902.50 -5.5% 3.6% -0.2%
01 September 2010 16,865.00 24,262.50 23,095.00 36.9% 43.9% 1.3%
02 September 2010 25,890.00 26,615.00 23,275.00 -10.1% 2.8% 0.3%
03 September 2010 24,177.50 24,567.50 22,187.50 -8.2% 1.6% -0.1%
06 September 2010 24,800.00 35,520.00 33,337.50 34.4% 43.2% 1.8%
07 September 2010 33,585.00 39,745.00 35,435.00 5.5% 18.3% 0.5%
08 September 2010 33,422.50 41,670.00 37,002.50 10.7% 24.7% 0.1%
09 September 2010 38,540.00 43,817.50 41,962.50 8.9% 13.7% 0.6%
This strategy will be yield good return on daily basis giving a return of 10.2% (refer
the above table) average per day in the bullish conditions in the last 90 days.
Buy at Open price and sell it at day’s high or near to day’s high. Of course most of
the time, it is very difficult to sell exactly at day’s high price. But if a trader manages
to sell at day’s high, he can earn good return.
Case 2 - CALL – Buy today and sell tomorrow – in expected bull market
8
23 July 2010 41,650.00 43,032.50 39,940.00 2.8% 6.2% -1.5% 0.1%
26 July 2010 39,387.50 40,062.50 37,260.00 -1.4% 0.3% -6.7% -0.6%
27 July 2010 37,315.00 40,502.50 37,755.00 0.1% 8.7% 1.3% 0.2%
28 July 2010 37,935.00 38,642.50 33,065.00 0.5% 2.4% -12.4% -0.6%
29 July 2010 32,637.50 34,012.50 33,457.50 -1.3% 2.9% 1.2% 0.2%
30 July 2010 31,237.50 31,715.00 26,987.50 -6.6% -5.2% -19.3% -0.8%
02 August 2010 29,277.50 31,525.00 31,085.00 8.5% 16.8% 15.2% 1.2%
03 August 2010 31,225.00 31,375.00 29,745.00 0.5% 0.9% -4.3% 0.1%
04 August 2010 29,370.00 32,567.50 31,710.00 -1.3% 9.5% 6.6% 0.5%
05 August 2010 31,665.00 34,937.50 31,707.50 -0.1% 10.2% 0.0% -0.4%
06 August 2010 31,475.00 32,992.50 29,850.00 -0.7% 4.1% -5.9% -0.1%
09 August 2010 28,802.50 33,455.00 32,337.50 -3.5% 12.1% 8.3% 0.9%
10 August 2010 31,277.50 31,760.00 30,085.00 -3.3% -1.8% -7.0% -0.5%
11 August 2010 29,265.00 30,067.50 23,715.00 -2.7% -0.1% -21.2% -0.7%
12 August 2010 20,105.00 25,827.50 24,252.50 -15.2% 8.9% 2.3% -0.1%
13 August 2010 24,545.00 29,360.00 26,787.50 1.2% 21.1% 10.5% 0.7%
16 August 2010 26,427.50 28,227.50 23,222.50 -1.3% 5.4% -13.3% -0.6%
17 August 2010 23,870.00 25,092.50 23,687.50 2.8% 8.1% 2.0% -0.1%
18 August 2010 23,280.00 29,942.50 29,642.50 -1.7% 26.4% 25.1% 1.2%
19 August 2010 29,327.50 35,970.00 34,925.00 -1.1% 21.3% 17.8% 1.1%
20 August 2010 33,580.00 35,865.00 34,067.50 -3.9% 2.7% -2.5% -0.2%
23 August 2010 33,820.00 36,670.00 36,027.50 -0.7% 7.6% 5.8% 0.2%
24 August 2010 35,567.50 36,135.00 32,202.50 -1.3% 0.3% -10.6% -0.7%
25 August 2010 30,832.50 31,522.50 26,780.00 -4.3% -2.1% -16.8% -0.8%
26 August 2010 27,802.50 28,705.00 25,575.00 3.8% 7.2% -4.5% 0.3%
27 August 2010 24,502.50 27,157.50 19,852.50 -4.2% 6.2% -22.4% -1.3%
30 August 2010 23,707.50 24,480.00 20,197.50 19.4% 23.3% 1.7% 0.1%
31 August 2010 17,885.00 18,522.50 16,902.50 -11.4% -8.3% -16.3% -0.2%
01 September 2010 16,865.00 24,262.50 23,095.00 -0.2% 43.5% 36.6% 1.3%
02 September 2010 25,890.00 26,615.00 23,275.00 12.1% 15.2% 0.8% 0.3%
03 September 2010 24,177.50 24,567.50 22,187.50 3.9% 5.6% -4.7% -0.1%
06 September 2010 24,800.00 35,520.00 33,337.50 11.8% 60.1% 50.3% 1.8%
07 September 2010 33,585.00 39,745.00 35,435.00 0.7% 19.2% 6.3% 0.5%
08 September 2010 33,422.50 41,670.00 37,002.50 -5.7% 17.6% 4.4% 0.1%
09 September 2010 38,540.00 43,817.50 41,962.50 4.2% 18.4% 13.4% 0.6%
When a trader expect a bull run to spread across a day or two, he can use this
strategy in option trading – buy at the close price or LTP or if possible at low price –
hold it for a day and sell it the next day’s high price.
Empirical evidence shows that this strategy has returned 9.9% (refer the above table)
daily return on an average basis.
9
Case 3 – CALL – Buy today – sell tomorrow or 2 days after – in expected strong
bull
10
30 August 2010 23,707.50 24,480.00 17,737.50 20,197.50 23.3% -4.3% 0.1%
31 August 2010 17,885.00 18,522.50 14,012.50 16,902.50 -8.3% -6.7% -0.2%
01 September 2010 16,865.00 24,262.50 16,092.50 23,095.00 43.5% 20.1% 1.3%
02 September 2010 25,890.00 26,615.00 22,502.50 23,275.00 15.2% 57.5% 0.3%
03 September 2010 24,177.50 24,567.50 21,502.50 22,187.50 5.6% 6.4% -0.1%
06 September 2010 24,800.00 35,520.00 24,352.50 33,337.50 60.1% 52.6% 1.8%
07 September 2010 33,585.00 39,745.00 32,640.00 35,435.00 19.2% 79.1% 0.5%
08 September 2010 33,422.50 41,670.00 32,490.00 37,002.50 17.6% 25.0% 0.1%
09 September 2010 38,540.00 43,817.50 29,587.50 41,962.50 18.4% 23.7% 0.6%
If anticipating strong bull run in the market for near future, say a week, traders can
safely follow a strategy of buying CALL option and holding it for one or two days.
However, this strategy works only when the market have high volatility. It involves
buying at LTP at the close of the trading and selling it at high price the following
trading day or in the 2nd trading day’s high price.
Again a question of guessing the day’s high price is a big deal for a trader. However,
the trader should have an expected rate of return. Evidence from CALL option on
NIFTY in the past 90 days shows this strategy returning 10% and 11% per day on
average (refer the above table).
11
26 July 2010 51,547.50 54,960.00 50,535.00 54,822.50 6.4% 6.6% -0.6%
27 July 2010 53,400.00 54,560.00 47,940.00 50,450.00 -5.5% 2.2% 0.2%
28 July 2010 50,345.00 57,472.50 46,480.00 56,795.00 12.8% 14.2% -0.6%
29 July 2010 53,930.00 57,480.00 47,515.00 50,540.00 -6.3% 6.6% 0.2%
30 July 2010 54,240.00 58,077.50 51,765.00 57,002.50 5.1% 7.1% -0.8%
02 August 2010 51,872.50 53,515.00 45,302.50 45,427.50 -12.4% 3.2% 1.2%
03 August 2010 45,337.50 48,022.50 43,725.00 44,255.00 -2.4% 5.9% 0.1%
04 August 2010 45,412.50 46,145.00 38,532.50 39,657.50 -12.7% 1.6% 0.5%
05 August 2010 39,750.00 42,100.00 37,215.00 41,800.00 5.2% 5.9% -0.4%
06 August 2010 40,577.50 44,235.00 38,242.50 42,050.00 3.6% 9.0% -0.1%
09 August 2010 40,992.50 42,377.50 35,467.50 36,695.00 -10.5% 3.4% 0.9%
10 August 2010 38,010.00 41,620.00 37,092.50 38,875.00 2.3% 9.5% -0.5%
11 August 2010 39,010.00 46,397.50 37,932.50 45,907.50 17.7% 18.9% -0.7%
12 August 2010 50,125.00 51,682.50 42,412.50 43,917.50 -12.4% 3.1% -0.1%
13 August 2010 40,840.00 41,572.50 34,265.00 36,185.00 -11.4% 1.8% 0.7%
16 August 2010 36,500.00 46,087.50 33,702.50 42,872.50 17.5% 26.3% -0.6%
17 August 2010 40,267.50 43,035.00 38,582.50 40,312.50 0.1% 6.9% -0.1%
18 August 2010 40,697.50 41,300.00 30,582.50 30,950.00 -24.0% 1.5% 1.2%
19 August 2010 30,932.50 31,667.50 26,367.50 27,005.00 -12.7% 2.4% 1.1%
20 August 2010 29,155.00 29,630.00 25,720.00 27,425.00 -5.9% 1.6% -0.2%
23 August 2010 26,362.50 28,095.00 24,780.00 25,640.00 -2.7% 6.6% 0.2%
24 August 2010 25,977.50 32,662.50 25,457.50 29,240.00 12.6% 25.7% -0.7%
25 August 2010 30,517.50 36,650.00 29,810.00 35,980.00 17.9% 20.1% -0.8%
26 August 2010 34,257.50 36,157.50 31,235.00 33,470.00 -2.3% 5.5% 0.3%
27 August 2010 34,672.50 45,672.50 30,247.50 44,782.50 29.2% 31.7% -1.3%
30 August 2010 36,305.00 45,522.50 33,917.50 38,717.50 6.6% 25.4% 0.1%
31 August 2010 43,400.00 50,642.50 40,297.50 42,840.00 -1.3% 16.7% -0.2%
01 September 2010 37,727.50 39,977.50 27,942.50 29,580.00 -21.6% 6.0% 1.3%
02 September 2010 26,020.00 28,967.50 24,622.50 27,805.00 6.9% 11.3% 0.3%
03 September 2010 26,160.00 29,670.00 25,577.50 27,740.00 6.0% 13.4% -0.1%
06 September 2010 23,662.50 23,932.50 13,870.00 14,955.00 -36.8% 1.1% 1.8%
07 September 2010 14,500.00 16,045.00 12,230.00 14,632.50 0.9% 10.7% 0.5%
08 September 2010 15,327.50 16,282.50 11,452.50 13,367.50 -12.8% 6.2% 0.1%
09 September 2010 12,232.50 16,020.00 9,347.50 10,042.50 -17.9% 31.0% 0.6%
Buying at opening and selling PUT option at day’s high would have earned a decent
return of 8.7%. However this strategy would earn more in the bear rather than bull.
If the market for the day is going to be bearish, a trader can buy a PUT and sell it at
LTP (if it gives good return and the direction of market is clear downward).
12
Case 5 – PUT - Buy today and sell tomorrow – in expected bear
13
31 August 2010 43,400.00 50,642.50 40,297.50 42,840.00 12.1% 30.8% 10.6% -0.2%
01 September 2010 37,727.50 39,977.50 27,942.50 29,580.00 -11.9% -6.7% -31.0% 1.3%
02 September 2010 26,020.00 28,967.50 24,622.50 27,805.00 -12.0% -2.1% -6.0% 0.3%
03 September 2010 26,160.00 29,670.00 25,577.50 27,740.00 -5.9% 6.7% -0.2% -0.1%
06 September 2010 23,662.50 23,932.50 13,870.00 14,955.00 -14.7% -13.7% -46.1% 1.8%
07 September 2010 14,500.00 16,045.00 12,230.00 14,632.50 -3.0% 7.3% -2.2% 0.5%
08 September 2010 15,327.50 16,282.50 11,452.50 13,367.50 4.7% 11.3% -8.6% 0.1%
09 September 2010 12,232.50 16,020.00 9,347.50 10,042.50 -8.5% 19.8% -24.9% 0.6%
Here a trader should buy PUT option and sell it at next day’s high price. But this
trading works only when the next day’s market is expected to be a bear. Selling at
next day’s high will earn a good return. In bull, NIFTY PUT option under this
strategy had returned 5.8%.
Case 6 – PUT - Buy today – sell tomorrow or 2 days after – in expected strong bear
14
04 August 2010 45,412.50 46,145.00 38,532.50 39,657.50 4.3% 1.6% 0.5%
05 August 2010 39,750.00 42,100.00 37,215.00 41,800.00 6.2% -4.9% -0.4%
06 August 2010 40,577.50 44,235.00 38,242.50 42,050.00 5.8% 11.5% -0.1%
09 August 2010 40,992.50 42,377.50 35,467.50 36,695.00 0.8% 1.4% 0.9%
10 August 2010 38,010.00 41,620.00 37,092.50 38,875.00 13.4% -1.0% -0.5%
11 August 2010 39,010.00 46,397.50 37,932.50 45,907.50 19.4% 26.4% -0.7%
12 August 2010 50,125.00 51,682.50 42,412.50 43,917.50 12.6% 32.9% -0.1%
13 August 2010 40,840.00 41,572.50 34,265.00 36,185.00 -5.3% -9.4% 0.7%
16 August 2010 36,500.00 46,087.50 33,702.50 42,872.50 27.4% 4.9% -0.6%
17 August 2010 40,267.50 43,035.00 38,582.50 40,312.50 0.4% 18.9% -0.1%
18 August 2010 40,697.50 41,300.00 30,582.50 30,950.00 2.4% -3.7% 1.2%
19 August 2010 30,932.50 31,667.50 26,367.50 27,005.00 2.3% -21.4% 1.1%
20 August 2010 29,155.00 29,630.00 25,720.00 27,425.00 9.7% -4.3% -0.2%
23 August 2010 26,362.50 28,095.00 24,780.00 25,640.00 2.4% 4.0% 0.2%
24 August 2010 25,977.50 32,662.50 25,457.50 29,240.00 27.4% 19.1% -0.7%
25 August 2010 30,517.50 36,650.00 29,810.00 35,980.00 25.3% 42.9% -0.8%
26 August 2010 34,257.50 36,157.50 31,235.00 33,470.00 0.5% 23.7% 0.3%
27 August 2010 34,672.50 45,672.50 30,247.50 44,782.50 36.5% 26.9% -1.3%
30 August 2010 36,305.00 45,522.50 33,917.50 38,717.50 1.7% 36.0% 0.1%
31 August 2010 43,400.00 50,642.50 40,297.50 42,840.00 30.8% 13.1% -0.2%
01 September 2010 37,727.50 39,977.50 27,942.50 29,580.00 -6.7% 3.3% 1.3%
02 September 2010 26,020.00 28,967.50 24,622.50 27,805.00 -2.1% -32.4% 0.3%
03 September 2010 26,160.00 29,670.00 25,577.50 27,740.00 6.7% 0.3% -0.1%
06 September 2010 23,662.50 23,932.50 13,870.00 14,955.00 -13.7% -13.9% 1.8%
07 September 2010 14,500.00 16,045.00 12,230.00 14,632.50 7.3% -42.2% 0.5%
08 September 2010 15,327.50 16,282.50 11,452.50 13,367.50 11.3% 8.9% 0.1%
09 September 2010 12,232.50 16,020.00 9,347.50 10,042.50 19.8% 9.5% 0.6%
Like CALL, PUT option also earns a return even in the bull. If it is a bear market, the
return of 5% (average – refer above table) would have been doubled.
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Conclusion
Overall all the above strategies can be blindly used in trading of options based on
the trader’s instinct on the market levels. If anyone could guess these levels, they can
be a successful trader. Having said that, such precise prediction is unlikely. But such
trades can earn a decent return if executed with strict trading disciplines. We would
like to remind that this strategy is better when used on market direction (on market
indices) rather than on stock options. In stock options, the dynamics in the price
movement is entirely based on two risks – market risk (both global and its industry)
and business risk. Combining these two risks to calculate the potential upside or
downward movements in stock price is highly impossible in short run. Most of the
time, it may turn our prediction down. Even remote news that is no way connected
with the underlying stock may affect its price movements. So it is better to bid on the
overall market direction with the proper mix of PUT and CALL on index might earn
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