Basics of Options - 5

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Decided to Buy a CALL Option, But which Strike? ITM, ATM, or OTM ?

Which expiry i need to select? Near month, Next month or Far month? 

The answer is very simple.

Follow me closely. If your are a speculator & your bet is, underlying will move very fast (i.e in 1-7 days) in north direction (i.e rise), then you should select Near month/Weekly expiry & OTM Call option near to the spot price.
The cost of this trade is very low, probability of winning this trade is around 30%.If you are wrong all your going to lose is your bet amount on table. Hence keep position size low. If you win, you will make fantastic returns on your bet. In terms of percentage returns, it is very huge( Of course, only if you win).
 
If your are a Trader & your bet is, underlying will move very fast 7 days to 1 month, in north direction (i.e rise), then you should select Near/Next month expiry & ATM Call option.
The cost of this trade is low, probability of winning this trade is around 50%. If you are wrong all your going to lose is your bet amount on table. Hence keep position size low. If you win, you will make good returns on your bet. In terms of percentage returns, it is huge ( Of course here also, only if you win).

If your are an Investor & your bet is, underlying will move very fast in 7 days to next 3 months, in north direction (i.e rise), then you should select ITM Call option of a far month expiry ( If possible go further longer term expiry)., where literally there is no time value. The cost of this trade is low, when compared to outright buying of underlying. The probability of winning this trade is around 75%. If you are wrong all your going to lose is your bet amount on table. Hence keep position size low. for an investor this is much better than buying underlying with huge capital & hoping that it will move in your favorable direction. With the same capital, buy using Call Options an Investor can place bets on at least 3 instruments. The pay off diagram is pretty similar to that of underlying. So, if we see in diversification perspective it is much better than buying one underlying. 

Still confusion? Just take some time & read the above topic again.

I am going to unveil the big secret in Options. Keep this secret with you, You should buy Call Options with less time value & with greater time to expiry. So that, you are giving greater time to your underlying to move in your favor. Where can we find this combination? Deep ITM strikes of CALL Options at very far expiry. 

I have explained, how can a Speculator / Trader / Investor can put their money in buying call options.
Winning probabilities. Risk/reward in each case. 

Options are simple Bets placed on movement of prices of underlying, which are also subjected to valid within specific time period ( Expiry ). Hence one should only keep manageable size of options under ones portfolio.

In next blog, I will try to explain, importance of Insurance to your stock &  How to Insure a stock which is in your portfolio?

Happy Learning,
Sandeep Tummuti.

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