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  • Short Call

Short Call

  • Posted by Trading Campus
  • Date May 17, 2017
  • Comments 94 comments

 

Underlying Strategy

Bearish or Neutral

When a trader is bearish on the instrument, or is expecting the instrument to have low movement to the upside.

Methodology

The trader shorts a Call option of the strike price, assuming that the instrument shall expire at or below the strike price at the time of its expiry.

Risk Profile:

This is a highly risky setup as the loss could be unlimited and the profit potential is limited.

However the probability of successful trades is more in selling OTM options.

Margin requirements are high for this strategy.

Calculations:

Max Potential Profit: Net premium received.

When: The stock is below the strike price at the time of expiry..

Max Potential Loss: Unlimited.

When: The stock crosses the strike price to the upside. 

Breakeven at expiration: Strike Price+Cost of the CE

Impact with passage of time

The CE price reduces with the passage of time, assuming the instrument price remains constant. Hence time decay works in favour of this strategy.

Illustration 

The trader has an expectation that Reliance had made an extreme up move and its time that its stock price would make a fall.

The trader has a view that either Reliance wont move upwards and remain neutral or make a bearish turn in the near future.

In order to take advantage of the neutral/bearish move , he decides to short an OTM CE of   strike price 1400, since he believes at the time of expiry Reliance would close below that price.

Note that this strategy has a limited profit but unlimited loss, so the trader should put up a higher margin in order to place the trade.

The CE of 1400 strike price is trading at 32.7. By shorting the CE, the trader gets a net premium of (32.7)*LotSize=32..7*500=Rs.16350. This is the maximum profit of the trader in case the stock price expires below the strike price.

The breakeven point for the strategy is at

(Strike Price+premium)=1400+32.7=1432.7.

Hence net loss would occur Reliance closes above 1432.7 at the time of expiry.

Scenarios

Stock closes at Rs.1400.

Profit= (Net premium received)*Lot Size

Value of the CE will be 0

Hence Profit=(32.7)*500

=Rs.16350

Stock Closes at Rs. 1390

Profit=(Net Premium received)*Lot Size

Value of the CE will be 0

Hence Profit=(32.7)*500

Rs.16350

Stock closes at Rs. 1420

Value of CE will be 20

Profit=(Premium received-(Stock Price-Strike Price))*Lot Size

=(32.7-(1420-1400))*500

Rs.6350

Stock closes at Rs. 1450

Value of CE will be 50

Profit/Loss=(Premium received-(Stock Price-Strike Price))*Lot Size

=(32.7-(1450-1400))*LotSize

Loss =Rs. 8650

Value of Spot at expiry Lot Size Strike Price Net premium paid Value of Option P/L Net P/L*LOT SIZE
1340 500 1400 -32.7 0 32.7 16350
1350 500 1400 -32.7 0 32.7 16350
1360 500 1400 -32.7 0 32.7 16350
1370 500 1400 -32.7 0 32.7 16350
1380 500 1400 -32.7 0 32.7 16350
1390 500 1400 -32.7 0 32.7 16350
1400 500 1400 -32.7 0 32.7 16350
1410 500 1400 -32.7 10 22.7 11350
1420 500 1400 -32.7 20 12.7 6350
1430 500 1400 -32.7 30 2.7 1350
1440 500 1400 -32.7 40 -7.3 -3650
1450 500 1400 -32.7 50 -17.3 -8650
1460 500 1400 -32.7 60 -27.3 -13650
1470 500 1400 -32.7 70 -37.3 -18650
1480 500 1400 -32.7 80 -47.3 -23650
1490 500 1400 -32.7 90 -57.3 -28650
1500 500 1400 -32.7 100 -67.3 -33650
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May 17, 2017

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Short Put
May 20, 2017

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Bajaj Electricals Limited is engaged in engineering and projects; power distribution, illumination and consumer durables businesses.

It has a range of domestic and kitchen appliances comprising water heaters, room heaters, coolers, irons, mixers, induction cookers, toasters, kettles, microwave, rice cookers, gas stoves, non-electrical kitchen aids and pressure cookers.

It offers ceiling, table, pedestal, wall, fresh air and industrial fans, and lighting solutions, such as light sources, light emitting diode-based lighting products, domestic luminaires, torches and lanterns.

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The Company's business segments consist of

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The Lighting segment includes lamps, tubes and luminaries.

The Consumer Durables segment includes appliances and fans.

The Engineering & Projects segment includes transmission line towers, telecommunications towers, highmast, poles and special projects.

The Others segment includes diecasting and wind energy.

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