Do you sometimes think that the market index is going to drop?
That you could make a profit by adopting a position on the index? How does one implement a trading strategy to benefit from a downward movement in the index?
Today, using options, you have two choices:
1. Sell call options on the index; or,
2. Buy put options on the index
We have already seen the payoff of a call option.
The upside to the writer of the call option is limited to the option premium he receives upright for writing the option. His downside however is potentially unlimited. Having decided to write a call, which one should you write? Table 7.2 gives the premiums for one month calls and puts with different strikes.
Given that there are a number of one-month calls trading, each with a different strike price, the obvious question is: which strike should you choose ? Let us take a look at call options with different strike prices.
Assume that the current index level is 1250, risk-free rate is 12% per year and index volatility is 30%. You could write the following options :
1. A one month call on the Nifty with a strike of 1200.
2. A one month call on the Nifty with a strike of 1225.
3. A one month call on the Nifty with a strike of 1250.
4. A one month call on the Nifty with a strike of 1275.
5. A one month call on the Nifty with a strike of 1300.
Which of this options you write largely depends on how strongly you feel about the likelihood of the downward movement in the market index and how much you are willing to lose should this downward movement not come about.
That you could make a profit by adopting a position on the index? How does one implement a trading strategy to benefit from a downward movement in the index?
Today, using options, you have two choices:
1. Sell call options on the index; or,
2. Buy put options on the index
We have already seen the payoff of a call option.
The upside to the writer of the call option is limited to the option premium he receives upright for writing the option. His downside however is potentially unlimited. Having decided to write a call, which one should you write? Table 7.2 gives the premiums for one month calls and puts with different strikes.
Given that there are a number of one-month calls trading, each with a different strike price, the obvious question is: which strike should you choose ? Let us take a look at call options with different strike prices.
Assume that the current index level is 1250, risk-free rate is 12% per year and index volatility is 30%. You could write the following options :
1. A one month call on the Nifty with a strike of 1200.
2. A one month call on the Nifty with a strike of 1225.
3. A one month call on the Nifty with a strike of 1250.
4. A one month call on the Nifty with a strike of 1275.
5. A one month call on the Nifty with a strike of 1300.
Which of this options you write largely depends on how strongly you feel about the likelihood of the downward movement in the market index and how much you are willing to lose should this downward movement not come about.