Covered Put

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Most retail traders usually buy options, i. Selling options is used when exiting options that were already bought. What this means is that by buying an option calls or puts the odds of losing are significantly more. Now the question is if options buyers are inherently taking a higher risk, who is on the other side of the trade with better odds of winning?

Let me explain with a basic introduction to what comprises option premium, different types of options, writing put options example interest and an example showing how most options expire worthless. Option premium, the value of calls or puts that you see on your trading screen has two components, Intrinsic value, and time value. Intrinsic value is how much the option is in the money, or simply how much you would get if the options were to expire right now.

Time value is the portion of premium which is writing put options example and above the intrinsic value of an option, i. The total number of open contracts for any option is called its Open Interest. In the example above if Nifty were to expire today atthe total options that would expire worthless would be: Yes, an option buyer can take quick intraday trades for a profit, or be on the right side of the market and have the potential of making unlimited profits, but the odds of winning are always in favor of an option writer who benefits with majority of options expiring worthless.

An option buyer has limited risk and unlimited profit potential, so if 1 writing put options example of Nifty call was bought at Rsthe maximum loss on this trade is the Rs Rs x 50and if Nifty went to the call would make a profit of Rs 45, When you write an option, say 1 lot of calls at RsRs Rs x 50 writing put options example is the premium paid by the buyer is credited to your trading account and this Rs on the premium is your maximum profit potential.

After taking this trade if. Since the potential losses are unlimited, it is best as a beginner option writer to be conservative, and allocate writing put options example a small portion of your trading capital when starting off. Since the writing put options example is unlimited for an option writer, the exchange blocks margin and similar to futures is writing put options example to market at the end of every day. So to buy an option at Rsyou need to have only Rs Rs x 50but to write an option you will need around Rs 25, which is marked to market daily, which means that if there is a loss you are asked to bring in those funds to your trading account by end of the day.

Option writing margin requirement varies for every contract, and as on today Zerodha is the only brokerage in India to offer a web based SPAN tool that lets you calculate this.

You have a bearish view of the market and Nifty is presently at Check the SPAN calculator for the margin required as shown below:. Love playing poker, basketball, and guitar. Around Rs required to short option. You can check it out yourself here: If i am exiting the writing put options example written mid waywriting put options example the process in Zerodha same as in case of buying a option.

I mean just by a single click on exit option i can the call option written. Can I hold the options over night [or till expiry] after shorting or is this settled at EOD automatically everyday? Will you charge interest for margin provided? Should I buy back my option before expiry or should I leave it to expire, especially if it is in the money ITM.

I have written November callnow today is expiry day, if market closes above writing put options example should Writing put options example do? How we calculate vix for a stock like Infosys, Last time 11 October Result Day I observed that Option prices increased from 6 October to 10 October, this time prices decreased from 6 Jan o 10 Jan. Calculation of Vix for a stock is pretty complex, let me see if I can find tool for you, nothing in the back of mind.

Dr Sir I a little confused on This point Nifty is on expiry, value of calls on expiry is 0, and you get to keep the entire Rs Nifty is on expiry, value of calls is still 0, and you get to keep the entire Rs Did You mean no profit no loss?

In mis at I totally agree with you. Very important and required information for all of us. I understand that margin is required when one writes the naked option and has to arrange MTM funds. A question in my mind for a long time is, when one takes a debit spread, say long call and short call, the maximum the person looses is the difference in premium which was already paid.

In such a case why should a writing put options example be collected, though the margin is less than naked option writing? Is it not sufficient to block selling the long option alone before covering the short option? The margins blocked are as per the exchange requirements, and yes the Writing put options example exchanges are extra stringent writing put options example this. Coming to your example, Long call and Short call, and assume only Rs 10, is blocked for this the buy premium.

Yes the scenario is unlikely, but possible. I guess the only way such spreads will become popular is if NSE starts letting people trade the spreads directly itself, similar to calendar spreads.

I want to write call and put nifty options Positionally. In this case we can get profit from premium melting. Other wise the lose also will be minimum and limited.

Can you give exposure? For above trading method, what is the margin for 4 lots qty? Ranganathan, you can check all margin requirements on our SPAN calculator: Krishna, it depends on what spread you are taking, check this blog on SPAN calculatorwhich shows how you can see the margin requirements of such spread using our SPAN calculator.

Just tried out your suggestion, but the math does not add up. Suppose I get into a bear call spread on Nifty, as follows:. SPAN margin — Rs: The total margin required is still Rs. The maximum loss on this spread is only Rs.

The risk is limited, and so should the margin. The difference between the return on capital is almost 5x. Why is the margin benefit so little? Is it possible to enable SPAN minimum requirements on individual trading accounts? Guc, what you need to realize is that the risk for such contract is never limited, there is always a big execution risk which is open and one of the reasons why margins are higher.

What if while exiting you got out of your buy CE position and market suddenly bounced up in this little time? The risk on your short CE would then be unlimited. Unless the spread itself starts trading on the market similar to calendar spreadsit will never be possible to block margins based on what you have suggested. Also, this is an exchange regulation and the SPAN calculator gives what exchange asks us to block. DC, advisory is tricky because: People will never follow advise properly, but the adviser is liable for it.

If it starts working, traders will become puppets to the adviser. What is missing is the liquidity, basically we need a lot more traders coming to the market, when they do, new products will automatically come about.

The bigger problem for everyone to solve is bringing in liquidity to the markets. I wish you include two parts like buying and writing in brokerage calculator. Which helps writers to include STT. STT changes for option buy positions, if it is in the money and you let it expire. You can read this blog for that. If you look at the default example on http: If it is possible to set a trigger in the trading terminal for executing option strategy, it makes life easier.

I mean when nifty futures trades at a set price, then the option strategy gets executed at market prices. Something like SL-M order.

Setting trigger like what you said, take an option strategy if Nifty trades at a price, it is little tricky, mainly because of the regulations. Exchange would consider that as an algo, which is not allowed for retail. For In the money options, Do we have facility to exercise the options at Spot price at end of Day?

How it will be carried out. Mukesh, all Indian options are Europen options. If you exercise them, they will be cash settled. For more, check out the options trading module on Varsity.

Nitin, On the last line algo for retailthere were a couple of SEBI circulars which wanted brokers to demonstrate appropriate risk writing put options example processes before offering writing put options example access to writing put options example customers. Is there some SEBI circular that prohibits retail from using algos? Is there also writing put options example SEBI circular under which exchanges derive power to validate algos?

What SEBI has writing put options example mandated is that for brokers providing algo, to compulsorily take part in mock trading sessions and a stricter audit. Let me try getting you the circular numbers on these.

Hi This is very wonderful article. Really I appreciate you. Recently I have opened trading account with OpetionsXpress. It is really wonderful system for trading in Options and Futures.

I recommend to you to visit that site and create a Virtual trading account and evaluate the platform which they are providing to their clients. Still we are far behind in technologies. Sir, I appreciate you. It is a very good article.

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In finance, a put or put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset the underlying , at a specified price the strike , by a predetermined date the expiry or maturity to a given party the seller of the put.

The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying. Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price.

In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the strike is K , and at time t the value of the underlying is S t , then in an American option the buyer can exercise the put for a payout of K-S t any time until the option's maturity time T.

The put yields a positive return only if the security price falls below the strike when the option is exercised. A European option can only be exercised at time T rather than any time until T , and a Bermudan option can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless. The buyer will not exercise the option at an allowable date if the price of the underlying is greater than K. The most obvious use of a put is as a type of insurance.

In the protective put strategy, the investor buys enough puts to cover his holdings of the underlying so that if a drastic downward movement of the underlying's price occurs, he has the option to sell the holdings at the strike price. Another use is for speculation: Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging.

By put-call parity , a European put can be replaced by buying the appropriate call option and selling an appropriate forward contract. The terms for exercising the option's right to sell it differ depending on option style.

A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration. The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss.

The put writer believes that the underlying security's price will rise, not fall. The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received.

Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price. The writer seller of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price.

Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. A naked put , also called an uncovered put , is a put option whose writer the seller does not have a position in the underlying stock or other instrument. This strategy is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game.

If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner buyer can exercise the put option, forcing the writer to buy the underlying stock at the strike price. That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price.

But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit. The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero bankruptcy , his loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received.

The potential upside is the premium received when selling the option: During the option's lifetime, if the stock moves lower, the option's premium may increase depending on how far the stock falls and how much time passes.

If it does, it becomes more costly to close the position repurchase the put, sold earlier , resulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss. In order to protect the put buyer from default, the put writer is required to post margin. The put buyer does not need to post margin because the buyer would not exercise the option if it had a negative payoff.

A buyer thinks the price of a stock will decrease. He pays a premium which he will never get back, unless it is sold before it expires. The buyer has the right to sell the stock at the strike price. The writer receives a premium from the buyer.

If the buyer exercises his option, the writer will buy the stock at the strike price. If the buyer does not exercise his option, the writer's profit is the premium. A put option is said to have intrinsic value when the underlying instrument has a spot price S below the option's strike price K. Upon exercise, a put option is valued at K-S if it is " in-the-money ", otherwise its value is zero.

Prior to exercise, an option has time value apart from its intrinsic value. The following factors reduce the time value of a put option: Option pricing is a central problem of financial mathematics. Trading options involves a constant monitoring of the option value, which is affected by changes in the base asset price, volatility and time decay. Moreover, the dependence of the put option value to those factors is not linear — which makes the analysis even more complex.

The graphs clearly shows the non-linear dependence of the option value to the base asset price. From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed.

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