Costly Love & Killer Affection

I love risk proposition; interested to enter risk based instruments and commit money on such contract, I like speculating the things for which decision is expected. Recent such commitment was for the TRAI (Telecom Regulatory Authority of India) decision pertaining to the Number portability. Though the implementation has to be made before 31st Oct, but I’m sure that it will not go as planned. The reason for my belief is that there have been at least three occasions when the deadlines were extended and this time also it will be extended by few more months. My commitment to this contract is beyond 31st Dec-2010.

But this sort of contract, occur as a result of off the line discussion and are not sufficient for my risk appetite. In my constant hunt for the risk based instrument, I ventured into a new of kind of stock market instrument i.e. “Writing option”.

I have tried buying call and put option many a times but never tasted success, though the indices were more or less towards my opted call/put price but not enough steam left in the market to cross those strike prices with heavy margins. My diagnosis was right but the prescription went wrong. As a result of which the current prices of my call and put were trading at a lower prices as compared to purchase prices. Contract reaching the expiry added more to the losses as premium for call and put options started eroding with each passing day.

But this time I wanted to take the premium of such contracted and decided to write a call. There were some clues that market has some steam to touch new high but will end up correcting heavily. But since my purchase, a correction seems to be ruled out and premium for my call has doubled amounting to huge losses.

Call options are more In-The-Money if the stock price goes higher, and if one sell a Call option and the underlying stock price goes down below the option's strike price (the option becomes Out-Of-The-Money), the option will expire worthless. And one can pocket the profit earned by selling the option. Which is exactly what I intended to do.

However, what happed was entirely reverse, these contract are infinite risk as the call price can rise to infinite. The real danger happens when the stock price keeps climbing and if it keeps going up, it will never become worthless, and near to expiration day someone is going to exercise the option and buy the stock from the seller who has earlier sold at a cheaper price as compared to today’s price. The seller is now in a heavy loss. Unfortunately the seller was me.

In a nutshell this article and experience is worth 4,000 bucks. Anyways I’m still interested to write the same call which has doubled by this time, at the same time I also admit that My love towards risky proposition is proving to be very costly and affection towards equity instrument to be Killer.

Let see if this works as per my expectation and will pray for a steep correction in the market.