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Monday, October 04, 2010

One months: Options Trade: Sell 6400CE for 50.00

Since the market seems to have topped out we can make some calculated bet.

I am thinking that NIFTY will not cross 6400 and one can safely sell NIFTY 6400CE at Rs 51.

It will cost approximately 30,000 for 50 units and if the market closes below 6400 by Oct 28,2010 you will make 2200 on your investment ie 7.3% in one month

PN: Options are usually very dangerous because of time value action and please donot invest more than 1 lot ie 50 units.


mk said...

Dear Prahalad,

How did you arrive at Rs.2200/-(7.3%)? Suppose nifty cross 6400 what will be the downside? Is there a way to calculate.

Eager to learn this though I am aware Options are not to be frequently done.

What'sUp Prahalad said...


- When you sell a CALL ie create a NIFTY 6400CAll Option 30,000 will be blocked from your account
- You will sell it say for Rs 50 ie you will receive 50x50 =Rs2500/=
- Now if the NIFTY Remains below 6400 the NIFTY6400CALL will be worth Rs0.0 on Oct 28,2010 (Last thursday of the month)
- Assuming you buy back the call at say 50 paisa then 50x50 = Rs25 from your account Rs 25 will be deducted and the Rs30,000 that was blocked will be released
- Buy and sell generally cost 150 each so transaction cost=300
- 2500(sell price 50) - 25(buyback price 50 paisa)-300(Transaction cost) = 2175
- Profit=2175 on an investment of Rs30,000 for one month ie 2175/30,000 = 7.25% which is the return for one month for 30,000 bucks!!

Its really a great option.. the only risk that you carry is if the Index rises to 6400.. right now at 6200 we are struggling and even if the index rises it has to sustain above 6400 till end of the month.. which is not likely so I would say its a great option..

Only caveat is do not over invest cause the market makers somehow can control the faith of NIFTY also.. and could catch you on the wrong side ..
Negative side:
Suppose the index closes at 6500 ie your 6400CALL would be worth Rs100 on Oct 28,2010 you will have to buyback the option at Rs5000 (100x50)

you would have lost 5000-2500+300 = 2800 on your investment of 30,000/= ie 9.3%

The thing is options loose value as time progresses due to time value component of the option.. The idea is to create options so that you can take advantage of the time value decay of option..

Its what the rich do.. cause it cost 2500 to buy a Rs50 6400CAL option but it takes 30,000 to write a 6400CALL option .. the good part is as the time value decay starts the option value reduces and you can buy back at lower prices..

=happy investing