What I have done is structured this chat as follows

1. Basics
2.Trading Possibilities
3.Different Strategies
4. TIS and how it can help formulate trading strategies
5. My experiences in trading options
I have tried to keep it simple and keep the math out of it since I find math a
bit complicated and confusing I have also tried to keep jargon out of it
because of the same reason - So here goes
Options Basics : An option is a contract, which gives the buyer the right,
but not the obligation to buy or sell shares of the underlying security at a
specific price on or before a specific date.
Options are popular as the buyer has limited investment and potentially
unlimited profits. Option is called an option because the buyer has an
option to exercise it or not. Unlike a future which is a definite obligation in
the sense that if you have bought it you have to sell it. With an option that
is not the case.
An option is a derivative. That is, its value is derived from something else.
In the case of a stock option, its value is based on the underlying stock
(equity).
In the case of an index option, its value is based on the underlying index
(Index).
Technically, an option is a contract between two parties. The buyer receives
a privilege for which he pays a premium. The seller accepts an obligation
for which he receives a fee. In our market we have two kinds of options:
Call Options and Put Options.
Call Option: It is an option to buy a stock/index at a specific price on or
before a certain date.. Call options usually increase in value as the value of
the underlying instrument rises.
When you buy a Call option, the price you pay for it, called the option
premium, secures your right to buy that certain stock at a specified price
called the strike price. If you decide not to use the option to buy the stock,
and you dont have to, your only cost is the option premium which will
expire at expiry.
Put Options: are options to sell a stock at a specific price on or before a
certain date. The put option gains in value as the value of the underlying
instrument decreases.
Options Terminology :
1. Strike Price : Is the price at which the buyer can exercise her right to buy
or sell i.e. if you hold a 4000 put and you exercise it your selling price will
be counted from 4000 and vice versa if you have a long call.

2. Price : It is the price of the option which you see on your screen. The cost
that you have to pay to get the right mentioned above.
The price is a function of the following factors and you must understand
this very well.
Please understand what is to follow as it forms the basis for trading options
The price is a function of the following factors and you must understand
this very well.
Intrinsic value : Take the case of a nifty 4100 pe. It is quoting at 192 when
the nifty spot is 4043. So its intrinsic value is only 57.( 4100 4043) The
value you would get if you exercised the option right now.The rest of the
price 135 (192 57) is the premium the seller ( also called the option
writer) is charging from you.
This premium usually is a function of time to expiration ( also called time
value), volatility ( which is a fn of events expected by the mkt) and
theoretically the interest rates also.However the most important is time
and volatility.
It is also important to understand one more thing. The difference between
American options ( CAs & PAs) and European options ( CEs & PEs)
The American options can be exercised everyday but the European options
can be exercised only on the expiry date.
So if you are wrting ( selling) American options there is a risk of being
assigned the option which may throw your strategy out of gear. Conversely
if you are long a European option you may not get the right price to sell if it
is illiquid.
Some other things about options that you need to know :
Premium: is tradeable and can increase or decrease depending upon the
price of the underlying.
Margins: Option buyers do NOT have to pay any margin except for the
premium paid to initiate a contract
Important :
Options sellers, however must pay a margin (as the liability is unlimited).
The margin here is the futures margin less the premium collected from the
buyer of the option.
Cash settlement: Since options is a type of derivatives contract, there is no
concept of delivery (as in stocks).
Options of various expiry dates are available for trading. Please check the
nse site for this. However all of them may not be liquid.

Some terminology you need to know :

In-the-money: A Call Option is said to be "In-the-Money" if the strike price is
less than the market price of the underlying stock. A Put Option is In-TheMoney when the strike price is greater than the market price.
Out-of-the-Money: A Call Option is said to be "Out-of-the-Money" if the
strike price is greater than the market price of the stock. A Put option is
Out-Of-Money if the strike price is less than the market price.
At-the-Money: The option with strike price equal to that of the market price
of the stock is considered as being "At-the-Money" or Near-the-Money.
So now that you know some of the things - the important question is why
trade options as opposed to cash or futures ?
Trading in options: is extremely profitable provided you know the trend of
the market. It is very easy to get returns of 100-200% within 4-5 days.
Options are popular with retail investors as the buyer has limited
investment and potentially unlimited profits. For nifty options, the
investment amount varies from Rs.2,000/- to Rs.10,000/-. You can also
invest Rs.500/- but chances of earning anything here are very slim unless
the market is poised to make a major move.
However remember the following
Buying options theoretically means limited loss, unlimited profits. The
investments are small so the loss is limited and known in advance. The
buyer of the option can thereotically earn unlimited profits
Option buying is immensely profitable if the market makes fast moves. The
losses start if a trade is wrong or markets start trading sideways.
I have lost more money trading options long than while trading options
short. The biggest risk factor is the time decay and drop in volatility which
affects option pricing. If markets remain rangebound or near expiry, options
decay very fast resulting in negligible profits or even losses.
Another popularly held view is : Writing options means limited profits,
unlimited losses
Even at my brokerage if I mention that I intend to write options I am often
advised against it
Strongly advised against it
However in real life in my experience the possibility of making money
writing options is much higher than while buying options
Option writers have a significantly higher chance of making money as
compared to option buyers

So why would anyone write options? The answer is time decay.

Remember in the markets there are three possibilities :
the markets may move in your direction
they may move against you
they may trade sideways and do nothing
If you write options then two of the three possibilities work in your favour
Option writers trade the time decay and volatility; the extent the market
moves is secondary! On the contrary, the option buyer has a good chance of
earning only if the market shows fast moves.
Slow and steady wins the race: While most investors are driven by greed
and high profit targets, option writers are satisfied with relatively low
returns. They are not interested in 50% gain in a month...in fact they are
very happy even if they earn 10% per month.
So, the next question is - how do you trade options Or rather - how can you
trade options ?
Buying and selling just options alone you have four possibilities :
1.
2.
3.
4.

You
You
You
You

can
can
can
can

buy a call (bullish outlook)

buy a put ( bearish outlook)
sell a call ( bearish Outlook)
sell a put ( bullish outlook)

However the interesting thing about options is that they can be combined
in a variety of ways which makes trading them safer.
Straddles
You can buy a put and a call of the same strike price e.g. 4100 ce + pe. It is
called a straddle. At the time of writing this it was at 150 & 200. So this
would cost you Rs. 350.You could also sell a straddle and you would get a
credit of Rs. 350
Strangles
Are also like straddles but at different strikes. E.g. buying a 4200 ce and a
3900 pe the cost would be 104 & 261 ie.e 365.Similarly you could also sell a
strangle for a credit of the same amount.
Spreads
A slightly more complicated strategy but more fun to put on is a spread. It
involves both buying and selling of similar options.
It gives some marging of safety as compared to just plain buying options.
For example today one could consider selling a 100 4000 pe for Rs. 160 and
buying 300 3800 pes for 90. Your credit is Rs. 16000 and debit is 27000
resulting in a net debit of 11000.
How does this strategy work ?

If the market moves your way i.e. down the price of the300 pes of 3800 will
increase tremendously carrying a huge premium while the price of the
short 4000 pe will not increase correspondingly as it will come well into the
money and the premium element will disappear considerably.
But why put on this spread when you can just buy pes and take the profits?
One does this to protect against the mkt moving against you.
Suppose the mkt were to move up then the value of the short 4000 pe will
start to decrease and offer some protection to you.
There are many different ways to put on spreads.
If you had bought a 4000 pe yesterday when it was trading around Rs. 90
its price today is 160 and you feel that the mkt may go down much further
but also want to protect your profits then what do you do ?
The answer is to sell a put of a lower strike say 3800 which is trading at 90.
This is the best position to be in when trading the options. You bought a
higher strike pe waited, the mkt moved your way and then yousold a lower
strike for nearlt the same amount.
Which means that you will not have a loss now if the mkt moves up. But you
have bought this insurance at a cost. And that cost is that you have limited
your profits if it falls below (3800 90) i.e. 3710
Similarly a spread can be put on by buying a near the money strike and
selling more than one far one if your view is that the mkt is range bound
If you think that the mkt is weak but not going to fall below 3800 then you
can buy 4000 pe and sell more than one 3800 pe or even 3700 if you want
to play it safer.
Combining an option with a future :
This also gives rise to tremendous possibilities for trading
Buy a future and sell a call
This is also called selling a covered call since you already own the
underlying. it is safer than just buying a naked future
as you have shorted a call it will offer you protection if the mkt moves down
but will limit your profit if it goes up
however if the mkt were to trade sideways then the time decay would also
work in your favour as the price of the call would start coming down as the
days pass
Sell a future and sell a put
this is the same as the combination mentioned above but with a bearish
outlook

buy a future and buy a put : by putting on this strategy you will be able to
limit your loss if the mkt comes down
but in order to profit from this the premium of the put will have to be low
and not as high as they are at the beining of the month
sell a future and buy a call : same as the above but in the reverse direction
Now we will talk about how to trade options profitably using the mkt
intelligence that TIS puts at your disposal :
Every monday there is a post from Aryan talking about anticuipated nifty
levels for the week One way to trade options using this wuould be to wait
for the high or the low to happen
suppose the high comes first and for this week assume that it is 4220 then
wait for the mkt to come close to this level and sell a call
say a 4300 or a 4400 ce and then cover it when the anticipated low comes
or if you are the adventurous kind you can short a pe at the anticipated low
and you would have put on a short strangle then all you have to do is wait
patiently for time to do its trick
The same strategy caould be put on using Airbus' insightful analysis of the
nifty levels as well this is a very simple way to profit from TIS - it is not very
aggressive but considerably safer and less hypertensive than trading the
intraday levels. also remember to trade options short in the direction of the
trend and not against it in that case even if you were to wrong all you have
to do is keep rolling over and wait for the postion to work in your favour
once again as they say bears live below the 200dma and the bulls above it
Now come to the last section :
Which is my experiments with Options to borrow a title :
When i first learnt about the introductions of options in the Indian mkts, I
was very happy and I thought they were a traders nirvana. I ventured forth
and started buying them and before I knew it was down more than a lakh
then i thought maybe i wasn't being very discriminating
so i strated buying them after some analysis and deliberation but I was still
losing money only after a few years of this i realised that to make money it
was important to play it safe in options. take profits quick, hedge and short
more than long
So if you were to aask me how to start trading options my answer will be as
follows :
Start with an adequate amount of capital, this is a very important
requirement as without this it would be impossible to short as the margins
are high

and in case yougot into a losing position you would have no capital left to
recover
Second mantra is to focus on protecting your capital rather than increasing
it this is very important. as the options are called a wasting asset and day
by day you will see them lose value.
What i do is trade nifty options only. since they are more liquid and a little
lesser prone to manipulations
Last year i had analysed opening high low and close of the nifty every
derivative month and the range was 253 nifty points. so if you could put on
a short straddle or strangle netting you close to 250 you had a winning
trade on your hands.put it on wait for 10 - 15 days and take your profits
time decay hits options very badly the period when the options lose value
very fast are from fridy to monday. from the change over from far month to
ner month and from the wednesday of the penultimate week of the
settlement so use these time frames to your advantage and short the
options deally short both puts and calls so you dont have to stay awake
watching what the Dow is doing no matter which way the mkt moves you
win
Another advantage of shorting the options is that you can roll over
for example I had shorted 3800 ce's in july and when Singh became King
I became a pauperbut all i did was to roll over
i had shorted at around 250 and was forced to square the jul settlement at
350 +
I quickly sold another call which was quoting around 350 and waited i
recovered a 100 points in aug
still had 200 more to go
I again shortef a call at 250 inthe next month
waited and recovered and went into profit when themkt fell waited and
recovered and went into profit when themkt fell
I am king now once again
so thats some of the ways in which one can trade options profitably I can
take another session next week after the questions this time around One
word of caution though
If you are short options and the mkt moves against you losses could be ver
heav
i got caught out in Jan and the only way around it is to have enough money
to take an opposing position with a future and quickly however that was
the only time the option short moved against me

Questions :

1. Mayur, u said u made money writing call options, would it be the same if
instead I buy put options ?
no abhijeet unless the mkt moves quickly in your favour i will give you an
example. suppose you were to buy a call 4200 at 101today if the mkt
moves up quickly then you are in luck and you can cash out quick but
suppose it takes 10 days to move up you may find that the call has not
moved up at all and if the mkt takes 15 - 20 days to move to 4250 then your
call value will actually decrease. so remember what i said first protect you
money
2. wrting in the money or out of the money is preferable
writing at the money is best since you need to get some premium into your
bank out of the money will give you an illusion of safety. but if the mkt
moves against you you will get fried since for a small amount you will be
exposed to large risks
3. how to protect money
yopu protect it by being quick to get in and out if the trade is long and by
appropriately hedging it. refer to my examples given which were taken at
todays prices,selling a straddle or strangle is giving you an inflow of 350
selling a straddle or strangle is giving you an inflow of 350
4000 + 350 = 4350 and 4000 - 350 = 3650
so as long as the nifty trades between 3650 and 4350 you are winning
4. do u look at any parameters like open interest in futures to corelate and
take naked option position

5. i trade in options and as u said i also make money writting calls , that is
because u earn good premium (time value) writting calls. I only wanted to
know since we can square off positon in both C E contracts of index futures
and C A contracts of stock futures. Then as u said europen contracts can be
squared off only at the time of expiry how come i can square off my nifty
options.
nifty options can only be squared off by purchasing them if short or selling
them if long but the american ones (equity) can be exercised at the end of
the day.so in the nifty you have to pay the mkt premium. I may have used
the wrong term 'square off' what i meant was exercising them
6. Just Let Know Abt OI Of option, if option increase for call or put wat it
means , for nifty nearest level of spot nifty
if OI increses that means that there is a lot activity in that particular
contract. youwould have to observe whether the price was rising or falling
with increase in OI to get a judgement of whether that option was being
written or not