Options - further

[Akaljot Singh]

Another mail.. in response to a mail I got.  --- On Sun, 6/3/12, Akaljot Singh <akal_...@yahoo.com> wrote: Its like this:  We sell puts at Rs 12. Market starts to fall. Put starts rising. It becomes Rs 30. We'll be asked to furnish extra Rs 18 X 50 = Rs 900 per put as Mark to market money (that's why I had mentioned 35k as security per put, actual security is about 29k). Similarly, lets say Nifty crashes to 4400. Puts will zoom to say Rs 100. We would've been asked to furnish 88 X 50 as MTM = Rs 4400 per put. This is pretty much the worst case scenario where a portion of your locked up security is being used up.  Now two things:  1. Nifty doesn't decline further. In this case the puts lose value as they start to erode because of time. On June 28, they will go to zero as they are out of the money. And during this erosion of money, daily we'll be receiving our MTM money back.  2. Nifty crashes to below 4200: The put value will be equal to 4200 minus its difference. Say Nifty is at 4170. Put value will be Rs 30. An we will lose Rs 18 per put.  =========================================================== But that is the entire bet. Will Nifty stay above 4200 (we make Rs 12) or fall below 4200 ( we lose equal to the amount it falls below 4200 as time premium vanishes by expiry).  =========================================================== No, one doesn't lose the whole amount of security. That amount is disproportionately high than the put value. 1stly, coming down to 4200 is difficult. Secondly, if it does, and lets say nifty crashes to 4000 by expiry, puts will be closing at Rs 200. So you'll lose Rs 200 X 50 = Rs 1000/- per Put. Out of 35k ie.  The security amount is released at the time of squaring up. Either within the month or on expiry/ settlement date.  Money is held in an account, which you can get whenever you square up your positions.  Regards --- On Sat, 6/2/12, Harsimran Singh <singh.h...@gmail.com> wrote: From: Harsimran Singh <singh.h...@gmail.com> Subject: Re: Options To: "Akaljot Singh" <akal_...@yahoo.com> Date: Saturday, June 2, 2012, 11:27 PM Playing market makers game. Right ? I think it is better than buying calls/puts as time works in MMs favour. Suppose the bet goes wrong - does it mean the whole amount kept as security goes?  Is it settled monthly ? One gets the security amount back at expiry?   On Sat, Jun 2, 2012 at 9:16 AM, Akaljot Singh <akal_...@yahoo.com> wrote: Consider the following:  Nifty closed yesterday at 4841.60 (June 01). Its 'Put' asking rates for June 28 settlement were:  Strike Price  Rate (rounded off)  4900 - Rs 172  4800 - Rs 125 4700 - Rs 89 4600 - Rs 63 4500 - Rs 44 4400 - Rs 29 4300 - Rs 19 4200 - Rs 12 4100 - Rs 7.50, Volume (least of the lot = 18529 for the day).  The market lot the above is 50. So a position in each costs (or yields) price X 50.  The game that I'm trying to suggest is a pretty standard one which is played by many. I'm just suggesting that we start a fund sort of operation and play it too. I'm fairly confident.  Consider the maths:  Let we sell the 4200 strike price Put today at Rs 12. We get an inflow of Rs 12 X 50 = Rs 600.  For this we have to submit as security an amount of money = 35,000/- (exchange rules).  Opportunity cost of this money at bank FD rate of 10% = 3500 p.a. = approx. Rs 300 p.m. Hence cost of funds = 300, and inflow = Rs 600/- which is secure as long as Nifty doesn't breach 4200. Return on money = Gain/cost = 300/300 = 100%. Alternative method, gain = Rs 600 X 12 = Rs 7200/35000 = 20.57% annualized.  For a meaningful no., multiply by 100, both 35000 & 600 & 300, we get, 35L security, 60k inflow & 30k profit income.  I would suggest we start with a smaller amount, discuss and make our bets.  Better still invite people to take such good odd bets available everyday.  Regards PS. At the 4300 strike price (which too is a fair bet), the returns jump to: 19 X 50 = 950 minus cost 300 = Rs 650 profit for June.  Return = 22.29%.