Wish to begin your first OPTIONS play just tomorrow ? No problem.
1. Please read this entire blog from A to Z, and in case you have any queries, ask them in the appropriate blog section(s). Don’t begin before you’re 101% sure of what you’re doing. Please note that reading (just quickly going through and making some jottings !) may take only about an hour or so (as of today), but it may result in substantial and far more complete information gain for you before you begin you options foray.
2. We suggest that you begin your OPTIONS practical training lessons with Reliance Calls as they are well traded and less volatile. Such a characteristic takes one important negative variable away - letting you begin your options play on a more positive note. You may either place your buy Call order telephonically with your broker, or, if you’re confident enough with your trading software, you may execute it yourself. PLEASE ALWAYS PLACE A LIMIT ORDER. In case you definitely want to buy at the visible price, just place your order quoting an additional 0.10, and confirm your order execution immediately thereafter. THIS CONFIRMATION OF THE EXECUTED TRADE IS VERY IMPORTANT, and cannot simply be over emphasized.
3. While buying Reliance Calls, regardless of the current price of the cash scrip (say 1900), you will find Calls available at different numerical levels (called strike levels), some less than 1900, others more than 1900. The farther away the Call’s strike level from the CMP, the more inexpensive (carrying less premium) it will be. On the contrary, if the strike level is closer to 1900, exactly at 1900 (if any), or even less than 1900 - it will be relatively more expensive (carrying higher premium). When the cash scrip price moves just a bit, Calls nearer to 1900 (or less) are likely to show much quicker movement (negative or positive), than those further away from 1900. So which strike level do we select for buying. Please see the following point.
4. You may be buying options in either a) a relative bullish scenario, b) an extreme bullish scenario, c) a bearish scenario, d) an extreme bearish scenario, or e) when the market is not showing much movement. Use the following general guidelines for a newbie options player :
Situation label >> recommended option action(example Reliance CMP 1900) :
a) Bullish scenario >>Buy & sell Calls about 1 or 2 notches above 1900 (strikes 1920, 1950)
b) Extreme bullish >>Buy & sell Calls even most distant from 1900 (Puts available very cheap)
c) Bearish scenario >>Just sit back, watch the movements and relax
d) Extreme bearish scenario >>Sell any Puts that you may have bought earlier (Calls available very cheap).
e) Range-bound market (limited, predictable movement) >>Just sit back, watch the movements and relax
Buy Calls at strike levels less than 1900 only if your budget permit. Such Calls carry higher premium. Calls & Puts are REVERSE instruments. -1900 Calls carry heavier premium, and +1900 Puts carry heavier premium too. The deeper inside 1900 the Calls, the heavier the premium, and the farther outside 1900 the Puts, the heavier the premium. For a more professional & safe approach, it pays to be armed with cheaply procured Calls & Puts - as father away from expiry as possible.
5. Don’t just proceed on a Call-buying spree straightaway. Study the Call pricing pattern (rise & decline vis-a-vis the level of indices, NIFTY, SENSEX) at least for a couple of days.
6. For a newbie, it would be safer to buy current month’s Calls any time between the 5th & 10th of the month. Any earlier, and you’ll find the Calls more expensive, and, any later, and you will find yourself perilously close to the month-end expiry (last Thursday of the month, by which date all Calls must be squared up, or, else, they expire automatically).
7. The day you proposed to buy Calls, try buying when the indices and the cash scrip CMP is closest to the lowest for the day. You will sure gain this proficiency by watching the Call/cash pattern for a couple of days.
8. VERY IMPORTANT : Never sell a Call, without having bought it first. Usually your trading software won’t permit you to sell a Call first, but, in case you have sufficient trading balance in your account, it may permit you to. So, please do guard against that. Selling Calls first makes you an option writer (see Terminology category). It may have grave implications if you become an option writer unintentionally.
9. Once you have bought your Calls, double-check the transaction in your trading account. Do ensure the chosen strike level, purchase price, the fact that the Call has indeed been bought and NOT sold first, as also the chosen validity month for the Call of your choice.
10. Don’t panic and sell your Call if you find its premium declining after your purchase. You still have about 10-15 days to exercise your selling OPTION !
11. Sell the Call(s) whenever you realize that the premium you’re getting is good enough for your liking. Don’t be too greedy. If you have purchased more than one Calls, it is usually better to sell in bits, rather than in one go.
12. Please note this VERY IMPORTANT point. If you bought Reliance 1920 strike level Calls at a premium of 30 when Reliance cash share price was just 1900, your total investment was 30 x 150 (shares per lot) x no. of lots purchased. You NEED NOT square off (sell your Calls) at or around expiry if the expected or real cash share price at that time is 1950 or more. Because this increase of 30 in the cash price now equals (and covers) your expenditure. Any more increase will be your profit. If by any chance the premium on your calls exceeds 50 (unlikely), do sell them off. Otherwise, just let your Calls expire, and you will automatically get Rs.50/- (new price 1950 minus old price 1900) x 150 x no. of lots purchased. However, if the cash share price at or around expiry is less than 1950, say 1935, then you need to weigh this against the prevalent premium of your Calls and act accordingly.
13. We strongly recommend that as a newbie you begin slowly, and play it small, safe and secure. Be happy with small & consistent profits. As you gain more exposure and begin to understand and appreciate the complex operatives of options, you will surely have your moments of BIG PROFITS … if, and only if, you carry a balanced head over your shoulders.