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.

“Option” left me with no option.

Day Thursday 24th Dec-09, Market made a V shaped recovery in the second half, I saw nifty trading somewhere around 5150 and my sixth sense said that “it is overvalued” and it should see some corrections. Though I was very skeptical about taking a short position in nifty and was totally clueless about how and what to judge in the market.

I decided to use one more instrument of trading i.e. options “call and put” for the first time, as there was a long week end ahead and only three trading days left for the year closing and contract closure of December, I though that nifty will see some correction in those three trading days.

But as usual; the fate of my financial transaction; the instrument that I sell appreciates and the instrument I bought depreciates, I took a put of 5000 nifty December at certain premium and since then nifty has appreciated by almost 50 points and the premium for the put option has deprecated by 40%. Though this was my first transaction in the options and was purely based on speculation and what is called sixth sense “which seems dosen;t seems to be prudent in my financial decisions”; I was at minimum risk of losing the premium if nifty doesn’t approaches the opted price figure. Still 2 days to go I’m keeping my fingers crossed.


For those who want to understand the technical terms here is a brief description

Option

An option contract gives the buyer the right, but not the obligation to buy/sell an underlying asset at a pre-determined price on or before a specified time. The option buyer acquires a right, while the option seller takes on an obligation. It is the buyer’s prerogative to exercise the acquired right. If and when the right is exercised, the seller has to honour it. The underlying asset for option contracts may be stocks, indices, commodity futures, currency or interest rates

Types of options

Options can be classified as ‘call’ options and ‘put’ options. When you buy a ‘call’ option, on a stock, you acquire a right to buy the stock. And when you buy a ‘put’ option, you acquire a right to sell the stock. You can also sell a ‘call’ option, in which, you will acquire an obligation to deliver the stock. And when you sell a ‘put’ option, you acquire an obligation to buy the stock.

Option premium

Option premium is the consideration paid upfront by the option holder (buyer of the option) to the option writer (seller of the option). The option holder gets the right to buy / sell the underlying

Strike price or the exercise price of the option

The right or obligation to buy or sell the underlying asset is always at a pre-decided price known as the ‘strike price’ or ‘exercise price’, which is linked to the prevailing price of the underlying asset in the cash market.

Technical terms source: www.financialexpress.com
Image source: seekingalpha.com