Options writing

Options writing: The money making tool used by professionals

What is Options writing?
We all know, about options carry a price tag for respective strike prices. Now, this price is dependent on Market volatility and time remaining for expiry.

Higher Volatility + full month remaining for current month expiry = Maximum value of Option

This means, we have to keep an eye on open interest for the strike price and also the number of trading days left for expiry.

Example:

 Market closing price = 8338
 Market lot size for Nifty = 25


Here for Strike price of 8400 Call option, the open interest is 3,968,850. The premium (price tag) for this strike price of 8400 CE is Rs. 85.15 (as of 5th Nov)

Now when market approaches closer to 8400, the price value of this CALL option contract increases.





Here for Strike price of 8000 Put option, the open interest is 5,548,850. The premium (price tag) for this strike price of 8000 PE is Rs. 15.45 (as of 5th Nov)

Now when market approaches closer to 8000, the price value of this PUT option contract increases.


Now, the professional Option writer, actually Sell the Call or Put option at desired level. He/She then waits patiently for the price to come down, eventually to Rs0.05 at the day of expiry.
Thus he /she earns on the depreciated amount just like short trades.

viz. If an option writer now sells 8400 Call at 85.00 and if market expires around 8200-8250 then on day of expiry, this value of 8400 Call will become Rs.0.05 making him earn (85-0.05)X 25 =  2100 per lot (approx).

Thus, option writing requires precise knowledge of where the market will go in a month and eventually earn on it.  He/She can exit any time by Buying the contract (which he sold earlier).

Risk: The writing of options carries high risk. The profit is limited whereas the loss is unlimited.

A friend of mine on Money control message board has nicely explained strategies to write options successfully.
{here ATM = At the money options means Strike price = Spot price
OTM = Out of the money options means Strike price = far from Spot price.

Example: Spot price = 8338. Then ATM Options will be of 8300 Call and 8300 Put and also 8400 call and 8200 Put.
The OTM options will be 8500 Call and 8100 Put. Deep OTM options will be call options > 8500 and Put options <8100}