04
Jun
11

First post

I have been writing options for quite some time. Writing or selling options is quite risky since your gains are limited to premium collected while your loss is unlimited, as shown by the black swan event like 2008 market crash across the world. As option writer, one stands to benefit from Implied Volatility(IV) and Time decay. IV as implied by the option premium, is the rate and magnitude of change in underlying prices. Time decay says that if underlying does not move much then, option will expire worthless (represented by greek theta). Anyways, options are wasting assets and their value declines over time.

Trading in options has increased significantly in Indian markets over last year and this is reflected in falling margins of major brokerage houses. Within option segment, Index options attract majority of volumes.

If you think market or stocks will remain range bound over extended period of time then, option writing is the way to go. Normally, I write Out of Money(OTM) Calls on individual stocks and rarely OTM Puts. First of all, I identify stocks which have announced either poor results or affected by any new development or major event which will impact their business significantly. Usually, these stocks take some time to recover and you stand to benefit from time decay. For e.g. – Infosys announced its Q4, 2011 results in April this year and market didn’t like its performance which was evident in stock reaction that fell 7 odd percentage. One could have easily sold its OTM Calls at 3300 or 3200 strike price and made quite a bit of money. Given the kind of selling which Infosys witnessed on huge volumes, it was extremely difficult for Infosys to go back and test 3200-3300 levels. I sold one 3300 Call for May series which was trading at Rs 19 that time. Writing options usually involve some kind of margin commitment and hence you calculate returns on margin provided. My returns on writing Infosys call were 4.59% in 18 days, which is quite decent by any standard.

Over next several posts, I will keep giving examples of trades which I have executed or about to execute. I believe, writing options if done sensibly can yield 25% annualized returns.

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