Futures & Options Made Easy PDF

FUTURES & OPTIONS Made Easy BECOME A PRO MONEY WILL FLOW FOCUS = SUCCESS!  FOME Futures & Options Made Easy by Avadhut Sathe Minimize Risk Optimize Reward Uncover th...

FUTURES & OPTIONS Made Easy BECOME A PRO MONEY WILL FLOW FOCUS = SUCCESS!  FOME Futures & Options Made Easy by Avadhut Sathe Minimize Risk Optimize Reward Uncover the Riches of Derivatives Market by Learning the Tricks of the Trade ! 2 3  FUTURES & OPTIONS Made Easy INDEX Derivatives…………............……………………………………….…………….......................8 Futures…………..........…………………………..…………………………………………………….10 Futures Terminologies…..……………………..……………………………………................11 Risk/Reward in Futures…….….….…………………………………………........................13 Futures Trading Strategies.....……………………..................................................14 Options……………….……..…………………………………..…………………........................17 Options Terminologies………..………………………..…………………………………………..19 Option Types…..…………………………………………………………………………………..…...23 Option Buying..…………………………………………………………………………………..…....25 Option Selling..……………………………………………………………………………..…..…....26 4 INDEX Options Premium............……………………………………….…………….......................27 Options Margin.........………………………………..……………………………………………….30 Selecting Strike Price……………………………….…………………….……….....................31 OI Data Interpretation………….….…………………………………………........................33 Naked Options – Buying / Selling.,………………………………………........................34 Exits in Options...…………………..……………………................................................39 Option Strategies: Covered Call………..…………………………………………………………………………………….41 Covered Put………………………………………………………………………………………..…….47 Vertical Spreads………………………………………………………………………………………..51 Bull Call Spread………………………………………………………………………………………...52 5 INDEX Bear Put Spread………………………………………………………………………………………..54 Ratio Spread............……………………………………….……………...............................61 Straddle…………..........………………………………..……………………………………………….62 Strangle………………….……………………………….…………………….……….....................64 Collar..………….….………………………………………….................................................69 Bull Put Ladder....…………………..……………………................................................74 Bear Call Ladder..……………………………………………………………………………………….77 Long Iron Butterfly……………………………………………………………………………..……..80 Short Iron Butterfly.…………………………………………………………………………………..82 Long Iron Condor..……………………………………………………………………………..………84 Short Iron Condor.……………………………………………………………………………………86 6 INDEX Calendar Spread..………………………………………..…………………………………………...88 Trading Strategies……………………………………………………………………………………..91 Factors to Keep in Mind…………………………………………………………………………….92 7 What is a Derivative?  It’s a financial product / contract which does not have it’s own value.  It derives it’s value from the underlying asset.  E.g. RELIANCE ticker traded in Futures market is a “derivative” of RIL stock from the cash (spot) market.  There are 2 such products available for trading on NSE: Stock Futures Stock Options 8 Why Derivates?  Less Money required to invest Example:  250 RIL shares @2250 in cash market = Rs. 5.62L approx.  1 lot (250 shares) of RIL in futures (@20% margin) = Rs. 1,12,500 approx.  1 lot of RIL - 2260 Call Option @ Rs. 50 premium = Rs. 12,500.00  Hedging against Investments  Speculating market or stock moves! Positional Trading Day Trading  Earning Rent on Stock Investments 9 Lets get started with Futures  Futures Contract It’s an agreement or a contract to Buy or Sell specified quantity of the underlying asset at a price agreed upon by the buyer and seller on or before a specified time. Both buyer and seller of the contract are “obligated” to Buy or Sell the underlying asset. Contract constitutes:  Size / Lot  Contract Month  Contract Expiry 10 Futures Terminologies  Contract Size Quantity of the particular stock / Market Lot  Contract Month Current or Near month Mid Month (2nd month) Far Month (3rd month)  Contract Expiry - Last Thursday of every month  Open Interest - Total outstanding positions in the Futures market at a given point of time  Volume- No. of contracts traded during a period  Spot - Price in the cash market  Margin- Deposit required to pay to the broker to take a position in F&O market  Cost of Carry- Premium over the spot price in Futures 11 Futures – Position Trading 12 Futures – Risk & Reward  Risk and Reward are unlimited for both Buyer and Seller.  Limit your Risk by following Stop Loss.  Hedging – Limited Risk & Reward If you are hedging against the underlying cash position then the risk and reward are both limited. Example: If you own RIL shares and Sell RIL in futures for equal quantity then your losses in spot position are off-set by gains in Futures position. You can get margin up to 80 % (depending on the stock) against the pledged equity. This margin can be used for futures trading and option selling. 13 Futures – Trading Strategies  Technical Analysis basis: Arrive at Price Target Use Money Management Rules to decide the contract size Remember 2% (single trade loss) & 10% (max monthly loss) Rule!  Open Interest basis: Long (Bullish) : OI is UP and Price is UP Short (Bearish) : OI is UP and Price is DOWN Short Covering (Bullish) : OI is DOWN and Price is UP Long Covering (Bearish) : OI is DOWN and Price is DOWN  Arbitrage: Futures Price is LESS than the Spot Price  Buy Futures & Sell Cash Futures Price is HIGER than the Spot Price  Sell Futures & Buy Cash 14 Trading Platform - ODIN 15 Futures – Recap  Limited investment in terms of margin payable to broker. Typically 15-25% of the total value Depends on Market wide exposure / Open Interest  Risk and Reward are unlimited.  Position needs to be monitored on daily basis as risk involved is unlimited.  Broker could square-off your position if margin requirements shoots above the funds deposited with the broker.  Deposited margin starts falling short rapidly if your trade start going against you. 16 17 Understanding Options  Was developed for Hedging and Speculating!  Option Contract is a ‘Right’ given by the Option Seller to the Option Buyer to buy or sell a specific asset at a specific price on or before a specific date.  Option Buyer or Holder: Has the ‘Right’ May or may not Exercise the Right Pays premium  Option Seller or Writer: Has the ‘Obligation’ If Buyer decides to Exercise the Option, the Seller must oblige (only applicable to American options, not applicable in Indian option market) Receives or Earns the Premium 18 Options Terminologies  Call Option – Long position / bullish  Put Option – Short position / bearish  Market Lot: Minimum number of units to be bought or sold E.g. for Nifty the lot size is 75  Strike Price: The price at which underlying stock can be bought or sold by the contract buyer E.g. for Nifty : 15000, 15050, 15100, 15150, 15200 and so on Strikes which are closer to the underlying are more liquid  Expiration Date – Last Thursday of every month for monthly Option contracts, Every Thursday for Weekly Option contracts: The date when the term of an option contract terminates  Option Holder: Buyer of an option  Option Writer: Seller of an option  Exercise Day : The date when the buyer / holder of an option exercises the Option 19 Options Terminologies  Option Value or Premium: Price the Buyer pays to buy a Call or Put option Intrinsic Value + Time Value  ATM – At the Money (break-even point): An option with strike price nearest to the current stock price  ITM – In the Money (profit zone): A CALL option with strike price below the stock price A PUT option with strike price above the stock price  OTM – Out of the Money (loss zone): A CALL option with strike price above the stock price A PUT option with strike price below the stock price 20 Stock Options – Contracts 3 Contracts are open at a time for stocks:  Near or Current Month - most liquid.  Next or Mid Month (2nd month) - mostly illiquid.  Far Month (3rd month) - almost zero liquidity in Indian Markets. For indices, in addition to these 3 contracts, weekly option contracts and long term monthly contracts are also available. 21 Commodity Options – Contracts For commodity, 3 monthly option Contracts are open at a time:  Near or Current Month - most liquid.  Next or Mid Month (2nd month) - mostly illiquid.  Far Month (3rd month) - almost zero liquidity in Indian Markets. For Gold and Silver, more than 3 monthly option Contracts are open at a time. 22 Option – Types  Call Option  Put Option  American Currently not used in Indian Market Can be Exercised CA: Call American PA: Put American  European Used for Index as well as Stocks, currencies and commodities Cannot be Exercised CE: Call European PE: Put European 23 Option – ODIN Screens 24  Option – Buying / Holding  Buyer has to pay Premium.  Has the Right to Exercise the Option.  Has no obligation of buying / selling the underlying security.  If a stock Call (Put) option expires deep ITM (more than 3 strikes), then the buyer must take (give) the delivery under physical settlement. To avoid delivery, one can adopt counter position through future or spreads.  All index options are cash settled.  Risk is limited to the extent of premium paid.  Reward could be unlimited. 25 Option – Selling / Writing  Receives the Premium.  Has to pay the margin for selling the option.  Margin is refundable at the end of the contract.  Has obligation to sell / buy the underlying security.  Reward is limited to the extent of premium received.  Risk is potentially higher than the premium received.  Risk could be controlled by employing various strategies. 26 Option Value OR Premium  Two Constituents: Intrinsic Value -  The amount by which the Option is in the Money Time Value -  The amount by which the Option is out of the money Premium = Intrinsic Value + Time Value  Two Constituents: If RIL spot is 2220 and RIL 2200 call (CE) is at a premium of Rs. 50 then Intrinsic Value : 20 Time Value : 30 27  Intrinsic Value & Time Value Underlying Stock 120 Market Value 110 100 Strike price = 100 90 Expiry 80 Time  Market value Option Time  40 Market Value Time value Expiry 30 Time value Time value 20 Time value Time value 10 Time value Intrinsic value Intrinsic value Intrinsic value Intrinsic value 28 Option Premium Important Determinants:  Price of the Underlying.  Volatility of the Underlying: It’s measure of the fluctuation in a stock or index’s price It helps to identify underpriced and overpriced options  Strike Price of the Option.  Time Remaining until the Option Expires.  Prevalent risk free interest rate: Typically 6 - 7% p.a. in India 29 Margin  Margin is paid by the Option Seller to cover for the unlimited risk involved.  Varies from 15% to 60%  In case of Covered Calls / Puts the margin requirement is less i.e. 5% to 15% because of the reduced / limited risk.  % margin requirement varies based on: Volatility of the stock in the cash market Market wide exposure limit in the Derivatives market  Market wide exposure: Exchange Limit Broker Limit (depending on the Open positions at the broker)  Typical margin requirement based on % OI (open interest) of the free Float (tradable share capital of the company) % OI : Margin 50% : 15% to 20% 70% : 25% 80% : 40% 90% to 100% : 90% 30  Selecting Strike Price  Select closest ITM / ATM strike or the next best OTM strike They are more liquid They give better ROI Check Example of Nifty below Strike Price Spot at Expiry Intrinsic Value Time Value at Nifty at Spot (Oct18) State (assumption) Premium at Expiry Expiry Gains ROI 16-10-2017 A B C D=B-A E G=(D+E)-C G/C 10650 ITM 10950 209 300 0 91 44% 10700 ITM 10950 188 250 0 62 33% 10750 ATM 10950 137 200 0 63 46% 10740 10800 OTM 10950 99 150 0 51 52% 10850 OTM 10950 69 100 0 31 45% 10900 OTM 10950 47 50 0 3 6% 10950 OTM 10950 31 0 0 -31 -100% Note: this table assumes the Spot Nifty to be at 10950 at the closing of 30 Oct 2017 31 Speculation  Technical Analysis is necessary (at least partial knowledge).  Find target for the stock price.  Identify Stop Loss (to manage Risk).  Bullish View: Buy Call Option Write (Sell) Put Option (also called shorting Put)  Bearish View: Buy Put Option Write (Sell) Call Option (also called shorting Call) 32 Option OI Data Interpretation CALL CE OI CE PRICE INTERPRETATION UP UP BULLISH/WATCHFUL DOWN UP STRONG BULLISH DOWN DOWN BEARISH UP DOWN STRONG BEARISH PUT PE OI PE PRICE INTERPRETATION UP UP BEARISH/WATCHFUL DOWN UP STRONG BEARISH DOWN DOWN BULLISH UP DOWN STRONG BULLISH 33 Naked Options – Buying / Selling Note: Call Seller makes money as long as spot remains below the strike price. Put Seller makes money as long as spot remains above the strike price. Seller needs to keep margin with the broker. 34 Pay-off Diagram (Call Buyer) BEP =1150 Note: The Call buyer makes loss (limited to 20) as long as spot remains below 1130 35 Pay-off Diagram (Call Seller) BEP =1150 Note: The Call Seller makes gains (limited to 20) as long as spot remains below 1130 36 Pay-off Diagram (Put Buyer) BEP =1060 Note: The Put buyer makes loss (limited to 20) as long as spot remains above 1080 37 Pay-off Diagram (Put Seller) BEP =1060 Note: The Put seller makes profit (limited to 20) as long as spot remains above 1080, Loss is unlimited below 1080 38 Exits  Settlement This is non-delivery based i.e. by payment of the difference of the buy / sell price.  Exit Strategies Wait till Expiry when the trade is going in your favor and market is trending. Square-off as soon as your exit criteria (based on TA) is met. Rolling (Sell the option and move to higher / lower strike). If there’s no liquidity in the ITM Call (Put) option, one may short (go Long) the Futures to lock profits. One may also trade in Futures as its risk-free trade. 39 Option Strategies  Insurance against market fall (Protective Put buying)  Covered Call  Vertical Spreads  Straddle  Strangle  Combinations – Butterfly, Collar, Ladder  Calendar Spread Note: Use Simple Strategies ONLY 40 Covered Call  Buying (or holding) underlying security and writing (selling) the ATM or next best OTM Call.  Good strategy in sideways (near support levels) and bullish markets.  It’s like earning Rent on your Property which is idle.  Why it makes sense? Only liquid calls are near-month expiry i.e. at most 22 days for expiry. As volatility reduces the Seller makes the difference of volatility premium. As time reduces, the Seller makes money on the reducing time value. If price is exactly at or below the strike at the time of expiry, the seller earns the entire premium. Risk is minimized by owning the Underlying security e.g. write RIL 2000 calls if you own RIL shares! 41 Covered Call Example Buy Reliance future @ Rs. 2210 Sell OTM Call of strike 2240 @40 Technical View is that Reliance will not go below 2170 Upside may be limited as major resistance is at 2240 42 Pay-off Diagram - Naked Future Buying BEP= 2210 43 Pay-off Diagram - Covered Call Strategy BEP= 2170 44 Covered Call – Stock & Strike Selection  Selecting Stock: Stocks which are either in up trend or sideways trend (range). You have a partial technical view i.e. reasonable knowledge of support and resistances based on past price history is good enough. The stock has corrected to it’s support levels.  Avoid Stocks: with Bearish Patterns overbought stocks which may turn down sharply Stocks which are operator driven Higher volatility  Selecting Strike price: If stock has rallied recently use nearest ITM strike to get better premium and have more hedge against downside If stock has corrected use best possible OTM If stock is long term investment and you want to protect capital gains then use ‘Deep OTM’ i.e. strike price further ahead from spot. 45 Covered Call – Follow-up / Exit  Do nothing – (if stock rallies)  What if Stock rallies and Call is exercised against you: No worries, you have already captured the entire gain against the stock that you hold. Write another ATM or OTM call if stock is still bullish.  Rolling Down: If stock falls further, you may cover the call you sold and Sell another lower ATM call. This way you could maximize the premium earned.  Stop Loss: If the stock breaks all important supports, you are better of closing the entire position. 46 Covered Put  Shorting the underlying security and writing (selling) the ATM or next best OTM Put.  Selecting Stock: Stocks which are either in down trend or sideways trend (range). You have a partial technical view i.e. reasonable knowledge of support and resistances based on past price history is good enough. The stock has rallied to it’s resistance level.  Avoid Stocks: With Bullish Patterns. Oversold stocks which may turn up sharply. Stocks which are operator driven.  Selecting Strike price: If stock has dropped recently use nearest ITM strike to get better premium and have more hedge against upside. If stock has rallied use best possible OTM. If market is extremely bearish and you want to maximize gains then use ‘Deep OTM’ i.e. strike price further ahead from spot. 47 Covered Put Example Sell Reliance Future @ Rs. 2210 Sell OTM Put of strike 2180 @40 Technical View is that Reliance will not go above 2250 Downside may be limited as major support is at 2180 48 Pay-off Diagram – Naked Future Selling BEP= 2210 49 Pay-off Diagram - Covered Put Strategy BEP= 2250 50 Vertical Spreads  Going long (buying) and short (selling) at the same time for the same type of option (i.e. both call or both put) with same expiry but different strike price. E.g. Buy RIL call of Strike 1000 & Sell RIL call of Strike 1050  Bull Spread: Buy Lower strike option (pay premium) Sell Higher strike option (receive premium)  Bear Spread: Sell Lower strike option (receive premium) Buy higher strike option (pay premium)  Debit Spread: When you pay the difference Bull Call spread (you are bullish) - like covered call Bear Put spread (you are bearish) – like covered put  Credit Spread: When you receive the difference Bear Call spread (you are bearish) Bull Put Spread (you are bullish) 51 Bull Call Spread (Like Covered Call)  Example : Nifty Call (spot : 15700)  Premiums 15800 Call : Rs. 55 15900 Call : Rs. 25  Investment Buy 15800 Call = 75 x 55 = Rs. 4125 paid Sell 15900 Call = 75 x 25 = Rs. 1875 received Net Investment = Rs. 2250  Margin requirement for Selling the Call Lower Margin because risk is covered by buying lower Strike call SP x Lot x margin% 15900 x 75 x 5% = Rs. 59625  Break-even point Difference of premium to be added to lower SP i.e. net debit is 55 – 25 = 30 i.e. when Nifty goes above 15800 + 30 = 15830, you start making money!  Risk Limited to 30 per unit if spot stays below 15800  Returns Limited to max. 70 per unit, you start making money if spot starts moving above 15830 When spot goes above 15900, the call option sold starts making loss thus limiting net gains to 70 52 Pay-off Diagram – Bull Call Spread BEP= 15830 53 Bear Call Spread  Example : Nifty Call (spot : 15700)  Premiums 15600 Call : Rs. 170 15500 Call : Rs. 240  Investment Sell 15500 Call = 75 x 240 = Rs. 18000 received Buy 15600 Call = 75 x 170 = Rs. 12750 paid Net premium received = Rs. 5250  Margin requirement for Selling the Call Lower Margin because risk is covered by buying higher Strike call SP x Lot x margin% 15500 x 75 x 5% = Rs. 58125  Break-even point Difference of premium to be added to lower SP i.e. net debit is 240 – 170 = 70 i.e. when Nifty goes below 15500 + 70 = 15570, you start making money!  Risk Limited to 30 per unit if spot stays above 15600  Returns Limited to max. 70 per unit, you start making money if spot starts moving down below 15570 When spot goes below 15500, the call option sold starts making loss thus limiting net gains to 70 54 Pay-off Diagram – Bear Call Spread BEP= 15570 55 Bear Put Spread (Like Covered Put)  Example : Nifty Put (spot – 15700)  Premiums 15600 : Rs. 80 15500 : Rs. 55  Investment Buy 15600 Put = 75 x 80 = Rs. 6000 paid Sell 15500 Put = 75 x 55 = Rs. 4125 received Net Investment = Rs. 1875  Margin requirement for Selling the Put Lower Margin because risk is covered by buying higher Strike Put SP x Lot x margin% 15500 x 75 x 5% = Rs. 58125  Break-even point Difference of premium to be deducted from higher strike i.e. 80 – 55 = 25 i.e. when Nifty goes below 15600 – 25 = 15575 you start making money!  Risk Limited to 25 per unit if spot stays above 15600  Returns Limited to 75 per unit, you start making money if spot starts moving down below 15575 When spot goes below 15500, the Put option sold starts making loss, thus limiting the net gains to 75 56 Pay-off Diagram – Bear Put Spread BEP= 15575 57 Bull Put Spread  Example : Nifty Put (spot – 15700)  Premiums 15800 Put : Rs. 180 15900 Put : Rs. 250  Investment Buy 15800 Put = 75 x 180 = Rs. 13500 paid Sell 15900 Put = 75 x 250 = Rs. 18750 received Net Investment = Rs. 5250  Margin requirement for Selling the Put Lower Margin because risk is covered by buying lower Strike Put SP x Lot x margin% 15900 x 75 x 5% = Rs. 59625  Break-even point Difference of premium to be deducted from higher strike i.e. 250 – 180 = 70 i.e. when Nifty goes above 15900 - 70 = 15830 you start making money!  Risk Limited to 30 per unit if spot stays below 15800  Returns Limited to 70 per unit, if spot starts moving up above 15830, you start making money When spot goes above 15900, the Put option sold starts making loss, thus limiting the net gains to 70 58 Pay-off Diagram – Bull Put Spread BEP= 15830 59 Understand the Concept  Let’s re-cap:  When you are Bullish you have 2 choices: Buy a Call Sell a Put  When you are bearish you have 2 choices: Buy a Put Sell a Call  Why use Spreads then? This is to reduce the investment. Limit the Risk of Selling an option : by buying another one of different strike. In the process you limit the Returns (but that’s ok when risk is limited).  We learnt Debit Spreads (covered call and covered put) in last slides.  Credit Spreads (do your own example): Concept is to earn the premium and limit the risk. Bull Put Spread (it’s like selling a put but minimizing the risk by buying lower strike put). Bear Call Spread (it’s like selling a call but minimizing the risk by buying higher strike call). 60 Ratio Spread  Buy and Sell calls/puts in the ratio of 2:1 or 3:2  You are expecting sharp move and want uncapped reward with reduced cost.  Very useful when the net debit is less than 25-30% of the spread.  E.g. Nifty Put Spreads in May series on 16th May  Buy 2 - 10600 puts : Rs. 52 x 2 = Rs. 104  Sell 1 – 10500 put : Rs. 32 x 1 = Rs. 32  Net Debit : Rs. 72 for 2 puts i.e. 36 per put.  Break-even point : Rs 10600 - 36 = 10564  Below 10564, the second put will start giving uncapped returns. 61 Straddle  Buy Call and Put of same strike price (ATM)  When to use this strategy?  Expecting some news which will result in wild move in either direction!  You are at Major Turning Point in the Market and volatility is low.  High Investment + Limited Risk + High Returns  Example – Infosys 27th May 2021 series, buy Call & Put of strike 1300  Premiums: 1300 Call : Rs. 35 1300 Put : Rs. 25  Investment: Call premium = 35 x 600 = 21000 Put premium = 25 x 600 = 15000 Total investment = 36000  Risk Limited to the total premium i.e. Rs. 36,000 (or 60 per share)  Reward Unlimited if spot goes beyond 1300 + 60 i.e. 1360 Unlimited if spot falls below 1300 – 60 i.e. 1240  Close on Expiry of May 2021 series : Rs. 1402 (gain of 42) 62 Pay-off Diagram – Long Straddle BEP= BEP= 1240 1360 63 Strangle (alternative to Straddle)  Buy Call of higher strike and Put of lower strike (both OTM)  When to use this strategy? Expecting wild move after range bound action Either in up or down direction  Moderate Investment + Limited Risk + High Returns  Example: Nifty 27th May 2021 series, buy 15000 Call & 14800 Put  Premiums (14910 Nifty spot on 20th May 2021) 15000 Call : Rs. 100 14800 Put : Rs. 90  Investment: Call premium = 100 x 75 = 7500 Put premium = 90 x 75 = 6750 Total investment = 14250  Risk Limited to the total premium i.e. Rs. 14250 (or 190 per unit)  Reward Unlimited if spot goes beyond 15000 + 190 i.e. 15190 Unlimited if spot falls below 14800 – 190 i.e. 14610  Nifty Close as on 27th May 2021 : 15338 (gain of 148) 64 Pay-off Diagram – Long Strangle BEP= BEP= 14610 15190 65 Range Bound Market  What to do if market is in a range?  We saw example of Strangle and Straddle in ‘long’ scenario i.e. you are buying both Put and Call.  If you are sure of market or stock to be range bound then the same strategy could be reversed E.g. low beta stocks like Powergrid, NTPC which usually trade in a range.  Short the Straddle: Sell Call and Put of same strike E.g. Sell Infosys 1300 Call and Put (premium Rs. 35 and Rs. 25 respectively) and pocket premium of 60 in total  Short the Strangle: Sell Call of higher strike and Put of lower strike E.g. when Nifty spot is near 14910: Sell 15000 Nifty Call and Sell 14800 Nifty Put (premium Rs. 100 & Rs. 90 respectively each) to pocket the premiums of 190 in total 66 Pay-off Diagram – Short Straddle BEP= BEP= 1240 1360 67 Pay-off Diagram – Short Strangle BEP= BEP= 14610 15190 68 Collar  It’s a steady continuation of the Main Trend or choppy market.  You are fed up of getting stopped out while trying to ride the trend. Hence, instead of keeping a stop loss, you buy protection and sell option to earn the premium, which takes care of the cost of protection.  Collar – Long Position: You are already long or looking to go long but wary of the stop loss as market might be choppy. Sell 1 OTM Call Buy 1 ATM / OTM Put as Protection on downside (put will be relatively cheap). No Stop Loss! Key is the Call will be expensive because of the trend and takes care of the cost of put.  Collar – Short Position: You are already Short or looking to go short but wary of the stop loss as market might be choppy. Sell 1 OTM Put Buy 1 ATM / OTM Call as Protection on upside. No Need to keep Stop Loss as you already have a protection. 69 Long Collar Example Bought Reliance @ Rs. 2190 When Reliance spot was in profit at 2200, converted to Long Collar by: Selling OTM Call of strike 2240 @ 40 Buying Put of strike 2200 @ 40 (invested the premium received by OTM Call selling in Buying downside protection by Put buying) 70 Pay-off Diagram – Long Collar 71 Short Collar Example Shorted Reliance future @ Rs. 2210 When Reliance spot was in profit at 2190, converted to Short Collar by: Sell OTM Put of strike 2160 @ 40 Bought Call of strike 2200 @ 40 (invested premium received by OTM Put selling in Buying downside protection by Call buying) 72 Pay-off Diagram – Short Collar 73 Bull Put Ladder  Deeper Correction? or Sideways? or Continuation of main trend? gain  Bullish Market but possibility of a sharp fall loss  Should be Net Credit: You are here  Sell 1 ATM put gain  Buy 1 OTM put  Buy 1 Further OTM put  In other words : use the premium of ATM put to buy 2 more OTM puts.  It’s like Bull Put Spread + Naked Put of Lower Strike for uncapped returns on downside.  Works well in medium to low Volatile Market, as premiums are comparatively low.  You will loose only when it goes sideways.  Max Risk: capped at difference first 2 strikes – net credit  Max Reward: Unlimited  Breakeven: Short Put strike – Net Credit  Breakeven: Lower Long Put strike – max risk amount 74 Bull Put Ladder Example  Expiry 24th Jun 2021; Shorted Nifty 15700 ATM strike Put and bought Nifty OTM strikes 15500 Put and 15400 Put  Premiums (15691 Nifty spot on 17th June 2021) 15700 Put : Rs. 130 15500 Put : Rs. 50 15400 Put : Rs. 30  Investment Sell 15700 Put = 75 x 130 = Rs. 9750 received Buy 15400 Put = 75 x 50 = Rs. 3750 paid Buy 15300 Put = 75 x 30 = Rs. 2250 paid Net premium received = Rs. 3750/-  Margin requirement for Selling the Put Lower Margin because risk is covered by buying lower Strike Put SP x Lot x margin% 15700 x 75 x 5% = Rs. 58875  Risk Maximum risk (in case Nifty remains sideways) will be limited to difference of Put strike sold and higher put strike bought – Net premium received. Maximum Risk = (15700 – 15500) – (130-50-30) = 150 75 Pay-off Diagram – Bull Put Ladder BEP= BEP= 15250 15650 76 Bear Call Ladder  Deeper Correction? or Sideways? or Continuation of main trend?  Bearish Market but possibility of a sharp rally gain You are here  Try Net Credit loss Sell 1 ATM call Buy 1 OTM call gain Buy 1 Further OTM call In other words : use the premium of ATM call to buy 2 more OTM calls.  It’s like Bear Call Spread + Naked Call for uncapped returns on upside.  Works well in medium to low Volatile Market.  You will loose only when it goes sideways and ends between the first two strike.  Max Risk: Capped at difference first 2 strikes – net credit  Max Reward: Unlimited  Breakeven: Short Call strike – Net Credit  Breakeven: Lower Long Put strike – max risk amount 77 Bear Call Ladder Example  Expiry 24th Jun 2021; Shorted Nifty 15700 ATM strike Call and bought Nifty OTM strikes 15800 Call and 15900 Call  Premiums (15691 Nifty spot on 17th June 2021) 15700 Call : Rs. 130 15900 Call : Rs. 50 16000 Call : Rs. 30  Investment Sell 15700 Call = 75 x 130 = Rs. 9750 received Buy 15900 Call = 75 x 50 = Rs. 3750 paid Buy 16000 Call = 75 x 30 = Rs. 2250 paid Net premium received = Rs. 3750/-  Margin requirement for Selling the Call Lower Margin because risk is covered by buying higher Strike Call SP x Lot x margin% 15700 x 75 x 5% = Rs. 58875  Risk Maximum risk (in case Nifty remains sideways) will be limited to difference of Call strike sold and lower Call strike bought – Net premium received. Maximum Risk = (15900 – 15700) – (130-50-30) = 150 78 Pay-off Diagram – Bear Call Ladder BEP= BEP= 15750 16150 79 Long Iron Butterfly  It’s a Volatile Market!  You are looking for a Sharp but Limited Moves in either direction (up or down). Sell 1 OTM call Buy 1 ATM call Bull Call Spread You are here Buy 1 ATM put Sell 1 OTM put Bear Put Spread In other words: Long Straddle + Short Strangle  Max Risk – Net debit  Max Reward – capped at difference in put or call spread minus net debit  Upper Breakeven : Long call strike + net debit  Lower Breakeven : Long put strike – net debit  Beauty is in maneuvering the trade!!!  Example : HDFC in June 2021 series (24th Jun 2021 Expiry) HDFC Spot on 17th Jun 2021 : 2490 View is that HDFC may fall below 2450 or rally above 2550 or so Sell 2550 call : Rs. 18 Buy 2500 call : Rs. 35 Buy 2500 put : Rs 42 Sell 2450 put : Rs 22 Total cost / debit : Rs. 17+20 = 37 80 Pay-off Diagram – Long Iron Butterfly BEP= BEP= 2463 2537 81 Short Iron Butterfly  It’s a Sideways market and quite frustrating - You don’t have to give up! You are here  Look to earn the time decay!! Buy 1 OTM call Sell 1 ATM call Sell 1 ATM put Buy 1 OTM put In other words: Short Straddle + Long Strangle for protection NET CREDIT!!!  Max Reward: Net Credit  Max Risk: capped at difference in put or call spread minus net credit.  Upper Breakeven : Short call strike + net credit  Lower Breakeven : Short put strike – net credit  Example: Reliance: Spot Closing is 2200 as on 17th Jun, 2021 Range: 2100 to 2300 (likely to remain within this range) Buy 2300 call : Rs. 18 (paid) Sell 2200 Call : Rs. 48 (earned) Sell 2200 Put : Rs. 49 (earned) Buy 2100 Put : Rs. 14 (paid)  Net Credit : Rs. 65/- 82 Pay-off Diagram – Short Iron Butterfly BEP= BEP= 2135 2265 83 Long Iron Condor  It’s a Volatile Market!  You are looking for a Sharp but Limited Moves in either direction (up or down). Sell 1 further OTM call Buy 1 OTM call Bull Call Spread You are here Buy 1 OTM put Sell 1 further OTM put Bear Put Spread In other words: Long Strangle + Short Strangle  Max Risk – Net debit  Max Reward – capped at difference in put or call spread minus net debit  Upper Breakeven : Long call strike + net debit  Lower Breakeven : Long put strike – net debit  Beauty is in maneuvering the trade!!!  Example : HDFC in June 2021 series (24th Jun 2021 Expiry) HDFC Spot on 17th Jun 2021 : 2490 View is that HDFC may fall below 2450 or rally above 2550 or so Sell 2600 call : Rs. 8 Buy 2550 call : Rs. 18 Buy 2450 put : Rs 22 Sell 2400 put : Rs 10 Total cost / debit : Rs. 10+12 = 22 84 Pay-off Diagram – Long Iron Condor BEP= BEP= 2428 2572 85 Short Iron Condor  It’s a Sideways market and quite frustrating - You don’t have to give up! You are here  Look to earn the time decay!! Buy 1 further OTM call Sell 1 OTM call Sell 1 OTM put Buy 1 further OTM put In other words: Short Strangle + Long Strangle for protection NET CREDIT!!!  Max Reward: Net Credit  Max Risk: capped at difference in put or call spread minus net credit.  Upper Breakeven : Short call strike + net credit  Lower Breakeven : Short put strike – net credit  Example: Reliance: Spot Closing is 2200 as on 17th Jun, 2021 Range: 2100 to 2300 (likely to remain within this range) Buy 2300 call : Rs. 18 (paid) Sell 2250 Call : Rs. 35 (earned) Sell 2150 Put : Rs. 37 (earned) Buy 2100 Put : Rs. 14 (paid)  Net Credit : Rs. 40/- 86 Pay-off Diagram – Short Iron Condor BEP= BEP= 2110 2290 87 Calendar Spread  Useful when Expiry is within a week.  Used to reduce the premium paid on the Option for the next month.  Your technical target might not be reached in the current month / series but you expect it to be achieved in next month.  Example : Nifty in 24th Jun 2021 Series Nifty Spot on 17th Jun 2021 - 15690 Your view is bearish i.e. you expect Nifty to crack below 15400 (old major support). It may not be achieved in this weekly expiry as days left are very few. So you sell 15600 PE of 24th Jun 2021 and buy 15600 PE of 1st Jul 21 (next weekly expiry).  Premium Jun 15600 PE : Rs.90 to be received Jul 15600 PE : Rs.127 to be paid Net investment : Rs.37 88 Options Recap  Investment is minimal: Premium is less than the margin required to pay while buying or selling in Futures.  Returns could be multi-bagger.  Risk is limited for the Buyer.  Excellent way to Hedge against your Cash Positions and earn Rent! Covered Calls  Use strategies as per the market situation to minimize risk. 89 Analysing Options Data  Use NSE website for Option Chain.  Key is analysing OI in ATM and Next-best OTM strikes- both Put & Call side: Highest OI indicates major support (Put Strike) & resistance (Call strike). If OI declines in ATM Calls with premium moving up: Healthy. If OI increases in ATM Calls with premium moving up: be watchful. 90 Trading Strategies  Swing Trading: ADX should be below 20 or Falling (ranging market). Short rallies near resistances : preferably Covered Put. Buy the dips near support levels : preferably Covered Call. Best employed when time value / premium is high:  Typically during start of the series  Highly volatile market  Momentum Trading: Trade in the direction of trend. ADX must be rising from 15 and above. Stock must be in upper half of Bollinger Bands for long or lower half for short with the Band in the direction of trade. Ok to Buy naked options or ratio spread (to reduce cost). Best employed when time value is moderate:  Typically during the middle of the series or towards end  Market is less volatile and volatility is expected to rise 91 Factors To Keep In Mind When Buying Options  Usually buy Deep In-the-Money Options (ITM): They suffer less from time decay They gain equally or higher as underlying moves in the favored direction (similar to future)  Always be ready to change positions – the last thing you should do is to hope and pray  Reduce your net investment by Selling Options wherever possible  Keep Reasonable profit target (unless market is trending in one direction)  Do not buy more naked options than is justified by your account size: E.g. don’t invest more than 5 to 8% of your total account value in naked option buying and use stop loss to limit the loss to 2%.  As far as possible use Credit Strategies: Sell Deep OTM Naked options or Use Bull Put or Bear Call Spreads (this has minimum risk) 92 Things Not To Forget Ever  In India, Options trading is almost impossible using fundamental analysis because Time is always against you.  Options trading is a speculative game and heavily loaded “against” the Option Buyer.  Over 80% of the Options expire worthless.  Option Writers are usually Big players having ability to control price moves (not always though).  Never Buy Deep OTM options because usually they expire worthless.  Write Options when volatility is high and Trend is in your favor. Usually high volatility is followed by lower one.  Market Trend only 30% of the time so employ strategies to capture range bound moves as well.  Making Money using Options could be boring, but if you love your money you will enjoy it! 93 94  Our Motto at ALL-FOR-ONE ONE-FOR-ALL DEVELOPING CHARACTER THAT DESERVES SUCCESS ! www.avadhutsathe.com