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INTRODUCTION TO OPTIONS

OPTIONS
1. INTRODUCTION TO OPTIONS
An option is a contract written by a seller that conveys to the buyer the right — but not the
obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a
particular asset, at a particular price (Strike price / Exercise price) in future. In return for
granting the option, the seller collects a payment (the premium) from the buyer. Exchangetraded
options form an important class of options which have standardized contract features
and trade on public exchanges, facilitating trading among large number of investors. They
provide settlement guarantee by the Clearing Corporation thereby reducing counterparty
risk. Options can be used for hedging, taking a view on the future direction of the market,
for arbitrage or for implementing strategies which can help in generating income for
investors under various market conditions.
1.1 OPTION TERMINOLOGY
· Index options: These options have the index as the underlying. In India, they have
a European style settlement. Eg. Nifty options, Mini Nifty options etc.
· Stock options: Stock options are options on individual stocks. A stock option contract gives
the holder the right to buy or sell the underlying shares at the specified price. They have an
American style settlement.
· Buyer of an option: The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller/writer.
· Writer / seller of an option: The writer / seller of a call/put option is the one who receives
the option premium and is thereby obliged to sell/buy the asset if the buyer exercises
on him.
· Call option: A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price.
· Put option: A put option gives the holder the right but not the obligation to sell an asset by
a certain date for a certain price.
· Option price/premium: Option price is the price which the option buyer pays to the
option seller. It is also referred to as the option premium.
· Expiration date: The date specified in the options contract is known as the expiration
date, the exercise date, the strike date or the maturity.
· Strike price: The price specified in the options contract is known as the strike price or the
exercise price.
· American options: American options are options that can be exercised at any time upto the
expiration date.
· European options: European options are options that can be exercised only on the
expiration date itself.
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· In-the-money option: An in-the-money (ITM) option is an option that would lead to a
positive cashflow to the holder if it were exercised immediately. A call option on the index
is said to be in-the-money when the current index stands at a level higher than the strike
price (i.e. spot price > strike price). If the index is much higher than the strike price, the
call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the
strike price.
· At-the-money option: An at-the-money (ATM) option is an option that would lead to zero
cashflow if it were exercised immediately. An option on the index is at-the-money when the
current index equals the strike price (i.e. spot price = strike price).
· Out-of-the-money option: An out-of-the-money (OTM) option is an option that would
lead to a negative cashflow if it were exercised immediately. A call option on the index is
out-of-the-money when the current index stands at a level which is less than the strike
price (i.e. spot price < strike price). If the index is much lower than the strike price, the call
is said to be deep OTM. In the case of a put, the put is OTM if the index is above the
strike price.
· Intrinsic value of an option: The option premium can be broken down into two
components – intrinsic value and time value. The intrinsic value of a call is the amount
the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it
another way, the intrinsic value of a call is Max[0, (St — K)] which means the intrinsic
value of a call is the greater of 0 or (St — K). Similarly, the intrinsic value of a put is Max[0,
K — St],i.e. the greater of 0 or (K — St). K is the strike price and St is the spot price.
· Time value of an option: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An option that is OTM
or ATM has only time value. Usually, the maximum time value exists when the option is
ATM. The longer the time to expiration, the greater is an option’s time value, all else equal.
At expiration, an option should have no time value.
1.2 OPTIONS PAYOFFS
The optionality characteristic of options results in a non-linear payoff for options. In simple
words, it means that the losses for the buyer of an option are limited, however the profits
are potentially unlimited. For a writer (seller), the payoff is exactly the opposite. His profits
are limited to the option premium, however his losses are potentially unlimited. These nonlinear
payoffs are fascinating as they lend themselves to be used to generate various
payoffs by using combinations of options and the underlying. We look here at the six basic
payoffs (pay close attention to these pay-offs, since all the strategies in the book are
derived out of these basic payoffs).
1.2.1 Payoff profile of buyer of asset: Long asset
In this basic position, an investor buys the underlying asset, ABC Ltd. shares for instance,
for Rs. 2220, and sells it at a future date at an unknown price, St. Once it is purchased, the
investor is said to be “long” the asset. Figure 1.1 shows the payoff for a long position on
ABC Ltd.
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Figure 1.1 Payoff for investor who went Long ABC Ltd. at Rs. 2220
The figure shows the profits/losses from a long position on ABC Ltd.. The investor bought ABC
Ltd. at Rs. 2220. If the share price goes up, he profits. If the share price falls he loses.
1.2.2 Payoff profile for seller of asset: Short asset
In this basic position, an investor shorts the underlying asset, ABC Ltd. shares for instance,
for Rs. 2220, and buys it back at a future date at an unknown price, St. Once it is sold, the
investor is said to be “short” the asset. Figure 1.2 shows the payoff for a short position on
ABC Ltd..
Figure 1.2 Payoff for investor who went Short ABC Ltd. at Rs. 2220
The figure shows the profits/losses from a short position on ABC Ltd.. The investor sold ABC Ltd.
at Rs. 2220. If the share price falls, he profits. If the share price rises, he loses.
1.2.3 Payoff profile for buyer of call options: Long call
A call option gives the buyer the right to buy the underlying asset at the strike price
specified in the option. The profit/loss that the buyer makes on the option depends on the
ABC Ltd.
ABC Ltd.
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spot price of the underlying. If upon expiration, the spot price exceeds the strike price, he
makes a profit. Higher the spot price, more is the profit he makes. If the spot price of the
underlying is less than the strike price, he lets his option expire un-exercised. His loss in
this case is the premium he paid for buying the option. Figure 1.3 gives the payoff for the
buyer of a three month call option (often referred to as long call) with a strike of 2250
bought at a premium of 86.60.
Figure 1.3 Payoff for buyer of call option
The figure shows the profits/losses for the buyer of a three-month Nifty 2250 call option. As can
be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes
above the strike of 2250, the buyer would exercise his option and profit to the extent of the
difference between the Nifty-close and the strike price. The profits possible on this option are
potentially unlimited. However if Nifty falls below the strike of 2250, he lets the option expire. His
losses are limited to the extent of the premium he paid for buying the option.
1.2.4 Payoff profile for writer (seller) of call options: Short call
A call option gives the buyer the right to buy the underlying asset at the strike price
specified in the option. For selling the option, the writer of the option charges a premium.
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, the spot
price exceeds the strike price, the buyer will exercise the option on the writer. Hence as the
spot price increases the writer of the option starts making losses. Higher the spot price,
more is the loss he makes. If upon expiration the spot price of the underlying is less than
the strike price, the buyer lets his option expire un-exercised and the writer gets to keep
the premium. Figure 1.4 gives the payoff for the writer of a three month call option (often
referred to as short call) with a strike of 2250 sold at a premium of 86.60.
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Figure 1.4 Payoff for writer of call option
The figure shows the profits/losses for the seller of a three-month Nifty 2250 call option. As the
spot Nifty rises, the call option is in-the-money and the writer starts making losses. If upon
expiration, Nifty closes above the strike of 2250, the buyer would exercise his option on the writer
who would suffer a loss to the extent of the difference between the Nifty-close and the strike
price. The loss that can be incurred by the writer of the option is potentially unlimited, whereas
the maximum profit is limited to the extent of the up-front option premium of Rs.86.60 charged by
him.
1.2.5 Payoff profile for buyer of put options: Long put
A put option gives the buyer the right to sell the underlying asset at the strike price specified in the
option. The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price is below the strike price, he makes a profit. Lower the
spot price, more is the profit he makes. If the spot price of the underlying is higher than the strike
price, he lets his option expire un-exercised. His loss in this case is the premium he paid for
buying the option. Figure 1.5 gives the payoff for the buyer of a three month put option (often
referred to as long put) with a strike of 2250 bought at a premium of 61.70.
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Figure 1.5 Payoff for buyer of put option
The figure shows the profits/losses for the buyer of a three-month Nifty 2250 put option. As can be
seen, as the spot Nifty falls, the put option is in-the-money. If upon expiration, Nifty closes below
the strike of 2250, the buyer would exercise his option and profit to the extent of the difference
between the strike price and Nifty-close. The profits possible on this option can be as high as the
strike price. However if Nifty rises above the strike of 2250, he lets the option expire. His losses
are limited to the extent of the premium he paid for buying the option.
1.2.6 Payoff profile for writer (seller) of put options: Short put
A put option gives the buyer the right to sell the underlying asset at the strike price
specified in the option. For selling the option, the writer of the option charges a premium. The
profit/loss that the buyer makes on the option depends on the spot price of the underlying.
Whatever is the buyer’s profit is the seller’s loss. If upon expiration, the spot price happens to be
below the strike price, the buyer will exercise the option on the writer. If upon expiration the spot
price of the underlying is more than the strike price, the buyer lets his option un-exercised and
the writer gets to keep the premium. Figure 1.6 gives the payoff for the writer of a three month
put option (often referred to as short put) with a strike of 2250 sold at a premium of 61.70.
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Figure 1.6 Payoff for writer of put option
The figure shows the profits/losses for the seller of a three-month Nifty 2250 put option. As the
spot Nifty falls, the put option is in-the-money and the writer starts making losses. If upon
expiration, Nifty closes below the strike of 2250, the buyer would exercise his option on the
writer who would suffer a loss to the extent of the difference between the strike price and Niftyclose.
The loss that can be incurred by the writer of the option is a maximum extent of the
strike price (Since the worst that can happen is that the asset price can fall to zero) whereas
the maximum profit is limited to the extent of the up-front option premium of Rs.61.70 charged
by him.
Let us now look at some more Options strategies.
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STRATEGY 1 : LONG CALL
For aggressive investors who are very bullish about the prospects for a stock / index, buying
calls can be an excellent way to capture the upside potential with limited downside risk.
Buying a call is the most basic of
all options strategies. It
constitutes the first options trade
for someone already familiar with
buying / selling stocks and would
now want to trade options. Buying
a call is an easy strategy to
understand. When you buy it
means you are bullish. Buying a
Call means you are very bullish
and expect the underlying stock /
index to rise in future.
When to Use: Investor is very
bullish on the stock / index.
Risk: Limited to the Premium.
(Maximum loss if market expires
at or below the option strike
price).
Reward: Unlimited
Breakeven: Strike Price +
Premium
Example
Mr. XYZ is bullish on Nifty on 24th June, when the
Nifty is at 4191.10. He buys a call option with a
strike price of Rs. 4600 at a premium of Rs. 36.35,
expiring on 31st July. If the Nifty goes above
4636.35, Mr. XYZ will make a net profit (after
deducting the premium) on exercising the option.
In case the Nifty stays at or falls below 4600, he
can forego the option (it will expire worthless) with
a maximum loss of the premium.
Strategy : Buy Call Option
Current Nifty index 4191.10
Call Option Strike Price (Rs.) 4600
Mr. XYZ Pays Premium (Rs.) 36.35
Break Even Point
(Rs.) (Strike Price
+ Premium)
4636.35
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ANALYSIS: This strategy limits the downside risk to the extent of premium paid by Mr.
XYZ (Rs. 36.35). But the potential return is unlimited in case of rise in Nifty. A long call
option is the simplest way to benefit if you believe that the market will make an upward
move and is the most common choice among first time investors in Options. As the stock
price / index rises the long Call moves into profit more and more quickly.
The payoff schedule
On expiry Nifty
closes at
Net Payoff from Call
Option (Rs.)
4100.00 -36.35
4300.00 -36.35
4500.00 -36.35
4636.35 0
4700.00 63.65
4900.00 263.65
5100.00 463.65
5300.00 663.65
The payoff chart (Long Call)
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STRATEGY 2 : SHORT CALL
When you buy a Call you are hoping that the underlying stock / index would rise. When
you expect the underlying stock / index to fall you do the opposite. When an investor is
very bearish about a stock / index and expects the prices to fall, he can sell Call options.
This position offers limited profit potential and the possibility of large losses on big
advances in underlying prices. Although easy to execute it is a risky strategy since the
seller of the Call is exposed to unlimited risk.
1.
A Call option means an Option
to buy. Buying a Call option
means an investor expects the
underlying price of a stock /
index to rise in future. Selling a
Call option is just the opposite
of buying a Call option. Here the
seller of the option feels the
underlying price of a stock /
index is set to fall in the future.
When to use: Investor is very
aggressive and he is very
bearish about the stock /
index.
Risk: Unlimited
Reward: Limited to the amount
of premium
Break-even Point: Strike Price
+ Premium
Example:
Mr. XYZ is bearish about Nifty and expects it to fall.
He sells a Call option with a strike price of Rs. 2600
at a premium of Rs. 154, when the current Nifty is at
2694. If the Nifty stays at 2600 or below, the Call
option will not be exercised by the buyer of the Call
and Mr. XYZ can retain the entire premium of Rs.
154.
Strategy : Sell Call Option
Current Nifty index 2694
Call Option Strike Price (Rs.) 2600
Mr. XYZ receives Premium (Rs.) 154
Break Even Point (Rs.)
(Strike Price +
Premium)*
2754
* Breakeven Point is from the point of Call Option Buyer.
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2.
ANALYSIS: This strategy is used when an investor is very aggressive and has a strong
expectation of a price fall (and certainly not a price rise). This is a risky strategy since as
the stock price / index rises, the short call loses money more and more quickly and losses
can be significant if the stock price / index falls below the strike price. Since the investor
does not own the underlying stock that he is shorting this strategy is also called Short
Naked Call.
The payoff schedule
On expiry
Nifty closes at
Net Payoff from
the Call Options
(Rs.)
2400 154
2500 154
2600 154
2700 54
2754 0
2800 -46
2900 -146
3000 -246
The payoff chart (Short Call)
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STRATEGY 3 : SYNTHETIC LONG CALL: BUY
STOCK, BUY PUT
In this strategy, we purchase a stock since we feel bullish about it. But what if the price of
the stock went down. You wish you had some insurance against the price fall. So buy a Put
on the stock. This gives you the right to sell the stock at a certain price which is the strike
price. The strike price can be the price at which you bought the stock (ATM strike price) or
slightly below (OTM strike price).
In case the price of the stock rises you get the full benefit of the price rise. In case the price
of the stock falls, exercise the Put Option (remember Put is a right to sell). You have capped
your loss in this manner because the Put option stops your further losses. It is a strategy
with a limited loss and (after subtracting the Put premium) unlimited profit (from the stock
price rise). The result of this strategy looks like a Call Option Buy strategy and therefore is
called a Synthetic Call!
But the strategy is not Buy Call Option (Strategy 1). Here you have taken an exposure to an
underlying stock with the aim of holding it and reaping the benefits of price rise, dividends,
bonus rights etc. and at the same time insuring against an adverse price movement.
In simple buying of a Call Option, there is no underlying position in the stock but is entered
into only to take advantage of price movement in the underlying stock.
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When to use: When
ownership is desired of
stock yet investor is
concerned about near-term
downside risk. The outlook
is conservatively bullish.
Risk: Losses limited to
Stock price + Put Premium
– Put Strike price
Reward: Profit potential is
unlimited.
Break-even Point: Put
Strike Price + Put Premium
+ Stock Price – Put Strike
Price
Example
Mr. XYZ is bullish about ABC Ltd stock. He buys ABC
Ltd. at current market price of Rs. 4000 on 4th July. To
protect against fall in the price of ABC Ltd. (his risk),
he buys an ABC Ltd. Put option with a strike price Rs.
3900 (OTM) at a premium of Rs. 143.80 expiring on
31st July.
Strategy : Buy Stock + Buy Put Option
Buy Stock
(Mr. XYZ pays)
Current Market Price of
ABC Ltd. (Rs.)
4000
Strike Price (Rs.) 3900
Buy Put
(Mr. XYZ pays)
Premium (Rs.)
143.80
Break Even Point (Rs.)
(Put Strike Price + Put
Premium + Stock Price –
Put Strike Price)*
4143.80
* Break Even is from the point of view of Mr. XYZ. He has to
recover the cost of the Put Option purchase price + the
stock price to break even.
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Example :
ABC Ltd. is trading at Rs. 4000 on 4th July.
Buy 100 shares of the Stock at Rs. 4000
Buy 100 July Put Options with a Strike Price of Rs. 3900 at a premium of Rs. 143.80 per
put.
Net Debit (payout) Stock Bought + Premium Paid
Rs. 4000 + Rs. 143.80
Rs. 4,14,380/-
Maximum Loss Stock Price + Put Premium – Put Strike
Rs. 4000 + Rs. 143.80 – Rs. 3900
Rs. 24,380
Maximum Gain Unlimited (as the stock rises)
Breakeven Put Strike + Put Premium + Stock Price – Put Strike
Rs. 3900 + Rs. 143.80 + Rs. 4000 – Rs. 3900
= Rs. 4143.80
The payoff schedule
ABC Ltd. closes at
(Rs.) on expiry
Payoff from the
Stock (Rs.)
Net Payoff from the
Put Option (Rs.)
Net Payoff
(Rs.)
3400.00 -600.00 356.20 -243.80
3600.00 -400.00 156.20 -243.80
3800.00 -200.00 -43.80 -243.80
4000.00 0 -143.80 -143.80
4143.80 143.80 -143.80 0
4200.00 200.00 -143.80 56.20
4400.00 400.00 -143.80 256.20
4600.00 600.00 -143.80 456.20
4800.00 800.00 -143.80 656.20
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ANALYSIS: This is a low risk strategy. This is a strategy which limits the loss in case of fall
in market but the potential profit remains unlimited when the stock price rises. A good
strategy when you buy a stock for medium or long term, with the aim of protecting any
downside risk. The pay-off resembles a Call Option buy and is therefore called as Synthetic
Long Call.
The payoff chart (Synthetic Long Call)
+ =
Buy Stock Buy Put Synthetic Long Call
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STRATEGY 4 : LONG PUT
Buying a Put is the opposite of buying a Call. When you buy a Call you are bullish about the
stock / index. When an investor is bearish, he can buy a Put option. A Put Option gives the
buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and
thereby limit his risk.
A long Put is a
Bearish strategy. To
take advantage of a
falling market an
investor can buy Put
options.
When to use:
Investor is bearish
about the stock /
index.
Risk: Limited to the
amount of Premium
paid. (Maximum loss if
stock / index expires
at or above the option
strike price).
Reward: Unlimited
Break-even Point:
Stock Price – Premium
Example:
Mr. XYZ is bearish on Nifty on 24th June, when the
Nifty is at 2694. He buys a Put option with a strike
price Rs. 2600 at a premium of Rs. 52, expiring on
31st July. If the Nifty goes below 2548, Mr. XYZ will
make a profit on exercising the option. In case the
Nifty rises above 2600, he can forego the option (it
will expire worthless) with a maximum loss of the
premium.
Strategy : Buy Put Option
Current Nifty index 2694
Put Option Strike Price (Rs.) 2600
Mr. XYZ Pays Premium (Rs.) 52
Break Even Point (Rs.)
(Strike Price – Premium)
2548
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ANALYSIS: A bearish investor can profit from declining stock price by buying Puts. He
limits his risk to the amount of premium paid but his profit potential remains unlimited. This
is one of the widely used strategy when an investor is bearish.
The payoff schedule
On expiry Nifty
closes at
Net Payoff from
Put Option (Rs.)
2300 248
2400 148
2500 48
2548 0
2600 -52
2700 -52
2800 -52
2900 -52
The payoff chart (Long Put)
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STRATEGY 5 : SHORT PUT
Selling a Put is opposite of buying a Put. An investor buys Put when he is bearish on a
stock. An investor Sells Put when he is Bullish about the stock – expects the stock price to
rise or stay sideways at the minimum. When you sell a Put, you earn a Premium (from the
buyer of the Put). You have sold someone the right to sell you the stock at the strike price.
If the stock price increases beyond the strike price, the short put position will make a profit
for the seller by the amount of the premium, since the buyer will not exercise the Put option
and the Put seller can retain the Premium (which is his maximum profit). But, if the stock
price decreases below the strike price, by more than the amount of the premium, the Put
seller will lose money. The potential loss being unlimited (until the stock price fall to zero).
When to Use: Investor
is very Bullish on the
stock / index. The main
idea is to make a short
term income.
Risk: Put Strike Price –
Put Premium.
Reward: Limited to the
amount of Premium
received.
Breakeven: Put Strike
Price – Premium
Example
Mr. XYZ is bullish on Nifty when it is at 4191.10. He sells a
Put option with a strike price of Rs. 4100 at a premium of
Rs. 170.50 expiring on 31st July. If the Nifty index stays
above 4100, he will gain the amount of premium as the Put
buyer won’t exercise his option. In case the Nifty falls
below 4100, Put buyer will exercise the option and the Mr.
XYZ will start losing money. If the Nifty falls below
3929.50, which is the breakeven point, Mr. XYZ will lose
the premium and more depending on the extent of the fall
in Nifty.
Strategy : Sell Put Option
Current Nifty index 4191.10
Put Option Strike Price (Rs.) 4100
Mr. XYZ receives Premium (Rs.) 170.5
Break Even Point (Rs.)
(Strike Price – Premium)*
3929.5
* Breakeven Point is from the point of Put Option Buyer.
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The payoff schedule
On expiry Nifty
Closes at
Net Payoff
from the Put
Option (Rs.)
3400.00 -529.50
3500.00 -429.50
3700.00 -229.50
3900.00 -29.50
3929.50 0
4100.00 170.50
4300.00 170.50
4500.00 170.50
The payoff chart (Short Put)
ANALYSIS: Selling Puts can lead to regular income in a rising or range bound markets. But it
should be done carefully since the potential losses can be significant in case the price of the stock
/ index falls. This strategy can be considered as an income generating strategy.
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STRATEGY 6 : COVERED CALL
You own shares in a company which you feel may rise but not much in the near term (or at
best stay sideways). You would still like to earn an income from the shares. The covered call
is a strategy in which an investor Sells a Call option on a stock he owns (netting him a
premium). The Call Option which is sold in usually an OTM Call. The Call would not get
exercised unless the stock price increases above the strike price. Till then the investor in the
stock (Call seller) can retain the Premium with him. This becomes his income from the
stock. This strategy is usually adopted by a stock owner who is Neutral to moderately
Bullish about the stock.
An investor buys a stock or owns a stock which he feel is good for medium to long term but
is neutral or bearish for the near term. At the same time, the investor does not mind exiting
the stock at a certain price (target price). The investor can sell a Call Option at the strike
price at which he would be fine exiting the stock (OTM strike). By selling the Call Option the
investor earns a Premium. Now the position of the investor is that of a Call Seller who owns
the underlying stock. If the stock price stays at or below the strike price, the Call Buyer
(refer to Strategy 1) will not exercise the Call. The Premium is retained by the investor.
In case the stock price goes above the strike price, the Call buyer who has the right to buy
the stock at the strike price will exercise the Call option. The Call seller (the investor) who
has to sell the stock to the Call buyer, will sell the stock at the strike price. This was the
price which the Call seller (the investor) was anyway interested in exiting the stock and now
exits at that price. So besides the strike price which was the target price for selling the
stock, the Call seller (investor) also earns the Premium which becomes an additional gain
for him. This strategy is called as a Covered Call strategy because the Call sold is backed by
a stock owned by the Call Seller (investor). The income increases as the stock rises, but
gets capped after the stock reaches the strike price. Let us see an example to understand
the Covered Call strategy.
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You own shares in a company which you feel will not rise in the near term. You would like to
earn an income from the stock. The covered call is a strategy in which an investor Sells a Call
option on a stock he owns. The Call Option which is sold in usually an OTM Call. Selling the
Call option enables the investor to earn an income by way of the Premium received. The Call
would not get exercised unless the stock price increases above the strike price. Till then the
investor can keep the Premium with him which becomes his income. This strategy is usually
adopted by a stock owner who is Neutral or Bearish about the stock. At the same time, he does
not mind exiting the stock at a certain price. The investor can sell Call Options at the strike price
at which he would be fine with exiting the stock. By selling the Call Option the investor earns a
Premium. Not he position of the investor is that of a Call Seller (refer to Strategy 2), who owns
the underlying stock. If the stock price stays below the strike price the Call Buyer (Refer to
strategy 1) will not exercise the Call. The Premium is retained by the Call seller. This is an
income for him. In case the stock price goes above the strike price, the Call buyer who has the
right to buy the stock at the strike price will exercise the Call option. The Call seller who has to
sell the stock to the Call buyer will sell the stock to the Call buyer at the strike price. This was
the price which the Call seller was anyway interested in exiting the stock and now exits at that
price. So besides the strike price which was the target price for selling the stock the Call seller
also earns the Premium which becomes an additional gain for him.
When to Use: This is often
employed when an investor has a
short-term neutral to
moderately bullish view on the
stock he holds. He takes a short
position on the Call option to
generate income from the option
premium.
Since the stock is purchased
simultaneously with writing (selling)
the Call, the strategy is commonly
referred to as “buy-write”.
Risk: If the Stock Price falls to
zero, the investor loses the entire
value of the Stock but retains the
premium, since the Call will not be
exercised against him. So
maximum risk = Stock Price Paid –
Call Premium
Upside capped at the Strike price
plus the Premium received. So if
the Stock rises beyond the Strike
price the investor (Call seller) gives
up all the gains on the stock.
Reward: Limited to (Call Strike
Price – Stock Price paid) + Premium
received
Breakeven: Stock Price paid –
Premium Received
Example
Mr. A bought XYZ Ltd. for Rs 3850 and
simultaneously sells a Call option at an strike
price of Rs 4000. Which means Mr. A does not
think that the price of XYZ Ltd. will rise above
Rs. 4000. However, incase it rises above Rs.
4000, Mr. A does not mind getting exercised
at that price and exiting the stock at Rs. 4000
(TARGET SELL PRICE = 3.90% return on the
stock purchase price). Mr. A receives a
premium of Rs 80 for selling the Call. Thus
net outflow to Mr. A is
(Rs. 3850 – Rs. 80) = Rs. 3770. He reduces
the cost of buying the stock by this strategy.
If the stock price stays at or below Rs. 4000,
the Call option will not get exercised and Mr.
A can retain the Rs. 80 premium, which is an
extra income.
If the stock price goes above Rs 4000, the
Call option will get exercised by the Call
buyer. The entire position will work like this :
Strategy : Buy Stock + Sell Call Option
Mr. A buys the
stock XYZ Ltd.
Market Price (Rs.) 3850
Call Options Strike Price (Rs.) 4000
Mr. A receives Premium (Rs.) 80
Break Even Point
(Rs.) (Stock Price
paid – Premium
Received)
3770
24
Example :
1) The price of XYZ Ltd. stays at or below Rs. 4000. The Call buyer will not exercise the Call
Option. Mr. A will keep the premium of Rs. 80. This is an income for him. So if the stock has
moved from Rs. 3850 (purchase price) to Rs. 3950, Mr. A makes Rs. 180/- [Rs. 3950 – Rs.
3850 + Rs. 80 (Premium)] = An additional Rs. 80, because of the Call sold.
2) Suppose the price of XYZ Ltd. moves to Rs. 4100, then the Call Buyer will exercise the
Call Option and Mr. A will have to pay him Rs. 100 (loss on exercise of the Call Option).
What would Mr. A do and what will be his pay – off?
a) Sell the Stock in the market at : Rs. 4100
b) Pay Rs. 100 to the Call Options buyer : – Rs. 100
c) Pay Off (a – b) received : Rs. 4000
(This was Mr. A’s
target price)
d) Premium received on Selling Call Option : Rs. 80
e) Net payment (c + d) received by Mr. A : Rs. 4080
f) Purchase price of XYZ Ltd. : Rs. 3850
g) Net profit : Rs. 4080 – Rs. 3850
= Rs. 230
h) Return (%) : (Rs. 4080 – Rs. 3850) X 100
Rs. 3850
= 5.97% (which is more than
the target return of 3.90%).
25
ATNhAeL YpSaISyoff schedule
XYZ Ltd. price closes at
(Rs.)
Net Payoff
(Rs.)
3600 -170
3700 -70
3740 -30
3770 0
3800 30
3900 130
4000 230
4100 230
4200 230
4300 230
The payoff chart (Covered Call)
+ =
Buy Stock Sell Call Covered Call
26
STRATEGY 7 : LONG COMBO : SELL A PUT,
BUY A CALL
A Long Combo is a Bullish strategy. If an investor is expecting the price of a stock to move
up he can do a Long Combo strategy. It involves selling an OTM (lower strike) Put and
buying an OTM (higher strike) Call. This strategy simulates the action of buying a stock (or
a futures) but at a fraction of the stock price. It is an inexpensive trade, similar in pay-off to
Long Stock, except there is a gap between the strikes (please see the payoff diagram). As
the stock price rises the strategy starts making profits. Let us try and understand Long
Combo with an example.
When to Use: Investor is
Bullish on the stock.
Risk: Unlimited (Lower Strike
+ net debit)
Reward: Unlimited
Breakeven :
Higher strike + net debit
Example:
A stock ABC Ltd. is trading at Rs. 450. Mr. XYZ is
bullish on the stock. But does not want to invest Rs.
450. He does a Long Combo. He sells a Put option with
a strike price Rs. 400 at a premium of Rs. 1.00 and
buys a Call Option with a strike price of Rs. 500 at a
premium of Rs. 2. The net cost of the strategy (net
debit) is Rs. 1.
Strategy : Sell a Put + Buy a Call
ABC Ltd. Current Market Price (Rs.) 450
Sells Put Strike Price (Rs.) 400
Mr. XYZ receives Premium (Rs.) 1.00
Buys Call Strike Price (Rs.) 500
Mr. XYZ pays Premium (Rs.) 2.00
Net Debit (Rs.) 1.00
Break Even Point (Rs.)
(Higher Strike + Net Debit)
Rs. 501
27
For a small investment of Re. 1 (net debit), the returns can be very high in a Long Combo,
but only if the stock moves up. Otherwise the potential losses can also be high.
The payoff schedule
ABC Ltd. closes at
(Rs.)
Net Payoff from
the Put Sold
(Rs.)
Net Payoff from the
Call purchased
(Rs.)
Net Payoff
(Rs.)
700 1 198 199
650 1 148 149
600 1 98 99
550 1 48 49
501 1 -1 0
500 1 -2 -1
450 1 -2 -1
400 1 -2 -1
350 -49 -2 -51
300 -99 -2 -101
250 -149 -2 -151
The payoff chart (Long Combo)
+ =
Sell Put Buy Call Long Combo
28
STRATEGY 8 : PROTECTIVE CALL /
SYNTHETIC LONG PUT
This is a strategy wherein an investor has gone short on a stock and buys a call to hedge.
This is an opposite of Synthetic Call (Strategy 3). An investor shorts a stock and buys an
ATM or slightly OTM Call. The net effect of this is that the investor creates a pay-off like a
Long Put, but instead of having a net debit (paying premium) for a Long Put, he creates a
net credit (receives money on shorting the stock). In case the stock price falls the investor
gains in the downward fall in the price. However, incase there is an unexpected rise in the
price of the stock the loss is limited. The pay-off from the Long Call will increase thereby
compensating for the loss in value of the short stock position. This strategy hedges the
upside in the stock position while retaining downside profit potential.
When to Use: If the investor is of
the view that the markets will go
down (bearish) but wants to
protect against any unexpected rise
in the price of the stock.
Risk: Limited. Maximum Risk is Call
Strike Price – Stock Price +
Premium
Reward: Maximum is Stock Price –
Call Premium
Breakeven: Stock Price – Call
Premium
Example :
Suppose ABC Ltd. is trading at Rs. 4457 in
June. An investor Mr. A buys a Rs 4500 call for
Rs. 100 while shorting the stock at Rs. 4457.
The net credit to the investor is Rs. 4357 (Rs.
4457 – Rs. 100).
Strategy : Short Stock + Buy Call Option
Sells Stock
(Mr. A receives)
Current Market
Price (Rs.)
4457
Buys Call Strike Price (Rs.) 4500
Mr. A pays Premium (Rs.) 100
Break Even Point
(Rs.) (Stock Price
– Call Premium)
4357
29
The payoff schedule
ABC Ltd. closes at
(Rs.)
Payoff from the
stock (Rs.)
Net Payoff from
the Call Option
(Rs.)
Net Payoff
(Rs.)
4100 357 -100 257
4150 307 -100 207
4200 257 -100 157
4300 157 -100 57
4350 107 -100 7
4357 100 -100 0
4400 57 -100 -43
4457 0 -100 -100
4600 -143 0 -143
4700 -243 100 -143
4800 -343 200 -143
4900 -443 300 -143
5000 -543 400 -143
The payoff chart (Synthetic Long Put)
+ =
Sell Stock Buy Call Synthetic Long Put
30
STRATEGY 9 : COVERED PUT
This strategy is opposite to a Covered Call. A Covered Call is a neutral to bullish strategy,
whereas a Covered Put is a neutral to Bearish strategy. You do this strategy when you feel
the price of a stock / index is going to remain range bound or move down. Covered Put
writing involves a short in a stock / index along with a short Put on the options on the stock
/ index.
The Put that is sold is generally an OTM Put. The investor shorts a stock because he is
bearish about it, but does not mind buying it back once the price reaches (falls to) a target
price. This target price is the price at which the investor shorts the Put (Put strike price).
Selling a Put means, buying the stock at the strike price if exercised (Strategy no. 2). If the
stock falls below the Put strike, the investor will be exercised and will have to buy the stock
at the strike price (which is anyway his target price to repurchase the stock). The investor
makes a profit because he has shorted the stock and purchasing it at the strike price simply
closes the short stock position at a profit. And the investor keeps the Premium on the Put
sold. The investor is covered here because he shorted the stock in the first place.
If the stock price does not change, the investor gets to keep the Premium. He can use this
strategy as an income in a neutral market. Let us understand this with an example .
When to Use: If the investor is of the
view that the markets are moderately
bearish.
Risk: Unlimited if the price of the stock
rises substantially
Reward: Maximum is (Sale Price of
the Stock – Strike Price) + Put Premium
Breakeven: Sale Price of Stock + Put
Premium
Example
Suppose ABC Ltd. is trading at Rs 4500 in
June. An investor, Mr. A, shorts Rs 4300 Put
by selling a July Put for Rs. 24 while
shorting an ABC Ltd. stock. The net credit
received by Mr. A is Rs. 4500 + Rs. 24 = Rs.
4524.
Strategy : Short Stock + Short Put Option
Sells Stock
(Mr. A
receives)
Current Market
Price (Rs.)
4500
Sells Put Strike Price (Rs.) 4300
Mr. A receives
Premium (Rs.) 24
Break Even Point
(Rs.) (Sale price of
Stock + Put
Premium)
4524
31
The payoff schedule
ABC Ltd.
closes at
(Rs.)
Payoff from
the stock
(Rs.)
Net Payoff
from the Put
Option (Rs.)
Net Payoff
(Rs.)
4000 500 -276 224
4100 400 -176 224
4200 300 -76 224
4300 200 24 224
4400 100 24 124
4450 50 24 74
4500 0 24 24
4524 -24 24 0
4550 -50 24 -26
4600 -100 24 -76
4635 -135 24 -111
4650 -160 24 -136
The payoff chart (Covered Put)
+ =
Sell Stock Sell Put Covered Put
32
STRATEGY 10 : LONG STRADDLE
A Straddle is a volatility strategy and is used when the stock price / index is expected to
show large movements. This strategy involves buying a call as well as put on the same
stock / index for the same maturity and strike price, to take advantage of a movement in
either direction, a soaring or plummeting value of the stock / index. If the price of the stock
/ index increases, the call is exercised while the put expires worthless and if the price of the
stock / index decreases, the put is exercised, the call expires worthless. Either way if the
stock / index shows volatility to cover the cost of the trade, profits are to be made. With
Straddles, the investor is direction neutral. All that he is looking out for is the stock / index
to break out exponentially in either direction.
When to Use: The investor thinks that
the underlying stock / index will
experience significant volatility in the
near term.
Risk: Limited to the initial premium
paid.
Reward: Unlimited
Breakeven:
· Upper Breakeven Point = Strike Price
of Long Call + Net Premium Paid
· Lower Breakeven Point = Strike Price
of Long Put – Net Premium Paid
Example
Suppose Nifty is at 4450 on 27th April. An
investor, Mr. A enters a long straddle by
buying a May Rs 4500 Nifty Put for Rs. 85 and
a May Rs. 4500 Nifty Call for Rs. 122. The net
debit taken to enter the trade is Rs 207, which
is also his maximum possible loss.
Strategy : Buy Put + Buy Call
Nifty index Current Value 4450
Call and Put Strike Price (Rs.) 4500
Mr. A pays Total Premium
(Call + Put) (Rs.)
207
Break Even Point
(Rs.)
4707(U)
(Rs.) 4293(L)
33
The payoff schedule
On expiry
Nifty closes at
Net Payoff from Put
purchased (Rs.)
Net Payoff from Call
purchased (Rs.)
Net Payoff
(Rs.)
3800 615 -122 493
3900 515 -122 393
4000 415 -122 293
4100 315 -122 193
4200 215 -122 93
4234 181 -122 59
4293 122 -122 0
4300 115 -122 -7
4400 15 -122 -107
4500 -85 -122 -207
4600 -85 -22 -107
4700 -85 78 -7
4707 -85 85 0
4766 -85 144 59
4800 -85 178 93
4900 -85 278 193
5000 -85 378 293
5100 -85 478 393
5200 -85 578 493
5300 -85 678 593
The payoff chart (Long Straddle)
+ =
Buy Put Buy Call Long Straddle
34
STRATEGY 11 : SHORT STRADDLE
A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the
investor feels the market will not show much movement. He sells a Call and a Put on the
same stock / index for the same maturity and strike price. It creates a net income for the
investor. If the stock / index does not move much in either direction, the investor retains
the Premium as neither the Call nor the Put will be exercised. However, incase the stock /
index moves in either direction, up or down significantly, the investor’s losses can be
significant. So this is a risky strategy and should be carefully adopted and only when the
expected volatility in the market is limited. If the stock / index value stays close to the
strike price on expiry of the contracts, maximum gain, which is the Premium received is
made.
When to Use: The investor thinks that
the underlying stock / index will
experience very little volatility in the
near term.
Risk: Unlimited
Reward: Limited to the premium
received
Breakeven:
· Upper Breakeven Point = Strike Price
of Short Call + Net Premium
Received
· Lower Breakeven Point = Strike Price
of Short Put – Net Premium Received
Example
Suppose Nifty is at 4450 on 27th April. An
investor, Mr. A, enters into a short straddle by
selling a May Rs 4500 Nifty Put for Rs. 85 and
a May Rs. 4500 Nifty Call for Rs. 122. The net
credit received is Rs. 207, which is also his
maximum possible profit.
Strategy : Sell Put + Sell Call
Nifty index Current Value 4450
Call and Put Strike Price (Rs.) 4500
Mr. A receives Total Premium
(Call + Put) (Rs.)
207
Break Even Point
(Rs.)*
4707(U)
(Rs.)* 4293(L)
* From buyer’s point of view
35
The payoff schedule
On expiry Nifty
closes at
Net Payoff from Put
Sold (Rs.)
Net Payoff from Call
Sold (Rs.)
Net Payoff
(Rs.)
3800 -615 122 -493
3900 -515 122 -393
4000 -415 122 -293
4100 -315 122 -193
4200 -215 122 -93
4234 -181 122 -59
4293 -122 122 0
4300 -115 122 7
4400 -15 122 107
4500 85 122 207
4600 85 22 107
4700 85 -78 7
4707 85 -85 0
4766 85 -144 -59
4800 85 -178 -93
4900 85 -278 -193
5000 85 -378 -293
-478
The payoff chart (Short Straddle)
+ =
Sell Put Sell Call Short Straddle
36
STRATEGY 12 : LONG STRANGLE
A Strangle is a slight modification to the Straddle to make it cheaper to execute. This
strategy involves the simultaneous buying of a slightly out-of-the-money (OTM) put and a
slightly out-of-the-money (OTM) call of the same underlying stock / index and expiration
date. Here again the investor is directional neutral but is looking for an increased volatility
in the stock / index and the prices moving significantly in either direction. Since OTM
options are purchased for both Calls and Puts it makes the cost of executing a Strangle
cheaper as compared to a Straddle, where generally ATM strikes are purchased. Since the
initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher.
However, for a Strangle to make money, it would require greater movement on the upside
or downside for the stock / index than it would for a Straddle. As with a Straddle, the
strategy has a limited downside (i.e. the Call and the Put premium) and unlimited upside
potential.
When to Use: The investor thinks
that the underlying stock / index will
experience very high levels of
volatility in the near term.
Risk: Limited to the initial premium
paid
Reward: Unlimited
Breakeven:
· Upper Breakeven Point = Strike
Price of Long Call + Net Premium
Paid
· Lower Breakeven Point = Strike
Price of Long Put – Net Premium
Paid
Example
Suppose Nifty is at 4500 in May. An investor, Mr.
A, executes a Long Strangle by buying a Rs. 4300
Nifty Put for a premium of Rs. 23 and a Rs 4700
Nifty Call for Rs 43. The net debit taken to enter
the trade is Rs. 66, which is also his maxi mum
possible loss.
Strategy : Buy OTM Put + Buy OTM Call
Nifty index Current Value 4500
Buy Call Option Strike Price (Rs.) 4700
Mr. A pays Premium (Rs.) 43
Break Even Point (Rs.) 4766
Buy Put Option Strike Price (Rs.) 4300
Mr. A pays Premium (Rs.) 23
Break Even Point (Rs.) 4234
37
The payoff schedule
On expiry
Nifty closes at
Net Payoff from Put
purchased (Rs.)
Net Payoff from Call
purchased (Rs.)
Net Payoff
(Rs.)
3800 477 -43 434
3900 377 -43 334
4000 277 -43 234
4100 177 -43 134
4200 77 -43 34
4234 43 -43 0
4300 -23 -43 -66
4400 -23 -43 -66
4500 -23 -43 -66
4600 -23 -43 -66
4700 -23 -43 -66
4766 -23 23 0
4800 -23 57 34
4900 -23 157 134
5000 -23 257 234
5100 -23 357 334
5200 -23 457 434
5300 -23 557 534
The payoff chart (Long Strangle)
+ =
Buy OTM Put Buy OTM Call Long Strangle
38
STRATEGY 13. SHORT STRANGLE
A Short Strangle is a slight modification to the Short Straddle. It tries to improve the
profitability of the trade for the Seller of the options by widening the breakeven points so
that there is a much greater movement required in the underlying stock / index, for the Call
and Put option to be worth exercising. This strategy involves the simultaneous selling of a
slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same
underlying stock and expiration date. This typically means that since OTM call and put are
sold, the net credit received by the seller is less as compared to a Short Straddle, but the
break even points are also widened. The underlying stock has to move significantly for the
Call and the Put to be worth exercising. If the underlying stock does not show much of a
movement, the seller of the Strangle gets to keep the Premium.
When to Use: This options trading
strategy is taken when the options
investor thinks that the underlying
stock will experience little
volatility in the near term.
Risk: Unlimited
Reward: Limited to the premium
received
Breakeven:
· Upper Breakeven Point = Strike
Price of Short Call + Net
Premium Received
· Lower Breakeven Point = Strike
Price of Short Put – Net Premium
Received
Example
Suppose Nifty is at 4500 in May. An investor,
Mr. A, executes a Short Strangle by selling a Rs.
4300 Nifty Put for a premium of Rs. 23 and a Rs.
4700 Nifty Call for Rs 43. The net credit is Rs.
66, which is also his maximum possible gain.
Strategy : Sell OTM Put + Sell OTM Call
Nifty index Current Value 4500
Sell Call Option Strike Price (Rs.) 4700
Mr. A receives Premium (Rs.) 43
Break Even Point (Rs.) 4766
Sell Put Option Strike Price (Rs.) 4300
Mr. A receives Premium (Rs.) 23
Break Even Point (Rs.) 4234
39
The payoff schedule
On expiry Nifty
closes at
Net Payoff from
Put sold (Rs.)
Net Payoff from Call
sold (Rs.)
Net Payoff
(Rs.)
3800 -477 43 -434
3900 -377 43 -334
4000 -277 43 -234
4100 -177 43 -134
4200 -77 43 -34
4234 -43 43 0
4300 23 43 66
4400 23 43 66
4500 23 43 66
4600 23 43 66
4700 23 43 66
4766 23 -23 0
4800 23 -57 -34
4900 23 -157 -134
5000 23 -257 -234
5100 23 -357 -334
5200 23 -457 -434
5300 23 -557 -534
The payoff chart (Short Strangle)
+ =
Sell OTM Put Sell OTM Call Short Strangle
40
STRATEGY 14. COLLAR
A Collar is similar to Covered Call (Strategy 6) but involves another leg – buying a Put to
insure against the fall in the price of the stock. It is a Covered Call with a limited risk. So a
Collar is buying a stock, insuring against the downside by buying a Put and then financing
(partly) the Put by selling a Call.
The put generally is ATM and the call is OTM having the same expiration month and must be
equal in number of shares. This is a low risk strategy since the Put prevents downside risk.
However, do not expect unlimited rewards since the Call prevents that. It is a strategy to be
adopted when the investor is conservatively bullish. The following example should make
Collar easier to understand.
This strategy involves
When to Use: The collar is a good
strategy to use if the investor is
writing covered calls to earn
premiums but wishes to protect
himself from an unexpected sharp
drop in the price of the underlying
security.
Risk: Limited
Reward: Limited
Breakeven: Purchase Price of
Underlying – Call Premium + Put
Premium
Example
Suppose an investor Mr. A buys or is holding ABC
Ltd. currently trading at Rs. 4758. He decides to
establish a collar by writing a Call of strike price
Rs. 5000 for Rs. 39 while simultaneously
purchasing a Rs. 4700 strike price Put for Rs. 27.
Since he pays Rs. 4758 for the stock ABC Ltd.,
another Rs. 27 for the Put but receives Rs. 39 for
selling the Call option, his total investment is Rs.
4746.
Strategy : Buy Stock + Buy Put + Sell Call
ABC Ltd. Current Market Price
(Rs.)
4758
Sell Call Option Strike Price (Rs.) 5000
Mr. A Receives Premium (Rs.) 39
Buy Put Option Strike Price (Rs.) 4700
Mr. A Pays Premium (Rs.) 27
Net Premium
Received(Rs.)
12
Break Even Point (Rs.) 4746
41
Example :
1) If the price of ABC Ltd. rises to Rs. 5100 after a month, then,
a. Mr. A will sell the stock at Rs. 5100 earning him a profit of Rs. 342 (Rs.
5100 – Rs. 4758)
b. Mr. A will get exercised on the Call he sold and will have to pay Rs. 100.
c. The Put will expire worthless.
d. Net premium received for the Collar is Rs. 12
e. Adding (a + b + d) = Rs. 342 -100 – 12 = Rs. 254
This is the maximum return on the Collar Strategy.
However, unlike a Covered Call, the downside risk here is also limited :
2) If the price of ABC Ltd. falls to Rs. 4400 after a month, then,
a. Mr. A loses Rs. 358 on the stock ABC Ltd.
b. The Call expires worthless
c. The Put can be exercised by Mr. A and he will earn Rs. 300
d. Net premium received for the Collar is Rs. 12
e. Adding (a + b + d) = – Rs. 358 + 300 +12 = – Rs. 46
This is the maximum the investor can loose on the Collar Strategy.
The Upside in this case is much more than the downside risk.
42
The Payoff schedule
ABC Ltd. closes
at (Rs.)
Payoff from
Call Sold
(Rs.)
Payoff from
Put Purchased
(Rs.)
Payoff
from stock
ABC Ltd.
Net payoff
(Rs.)
4400 39 273 -358 -46
4450 39 223 -308 -46
4500 39 173 -258 -46
4600 39 73 -158 -46
4700 39 -27 -58 -46
4750 39 -27 -8 4
4800 39 -27 42 54
4850 39 -27 92 104
4858 39 -27 100 112
4900 39 -27 142 154
4948 39 -27 190 202
5000 39 -27 242 254
5050 -11 -27 292 254
5100 -61 -27 342 254
5150 -111 -27 392 254
5200 -161 -27 442 254
5248 -209 -27 490 254
5250 -211 -27 492 254
5300 -261 -27 542 254
The payoff chart (Collar)
+ + =
Buy Stock Buy Put Sell Call Collar
43
STRATEGY 15. BULL CALL SPREAD STRATEGY:
BUY CALL OPTION, SELL CALL OPTION
A bull call spread is constructed by buying an in-the-money (ITM) call option, and selling
another out-of-the-money (OTM) call option. Often the call with the lower strike price will
be in-the-money while the Call with the higher strike price is out-of-the-money. Both calls
must have the same underlying security and expiration month.
The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long
Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish,
because the investor will make a profit only when the stock price / index rises. If the stock
price falls to the lower (bought) strike, the investor makes the maximum loss (cost of the
trade) and if the stock price rises to the higher (sold) strike, the investor makes the
maximum profit. Let us try and understand this with an example.
When to Use: Investor is
moderately bullish.
Risk: Limited to any initial
premium paid in establishing
the position. Maximum loss
occurs where the underlying
falls to the level of the lower
strike or below.
Reward: Limited to the
difference between the two
strikes minus net premium
cost. Maximum profit occurs
where the underlying rises to
the level of the higher strike
or above
Break-Even-Point (BEP):
Strike Price of Purchased call
+ Net Debit Paid
Example:
Mr. XYZ buys a Nifty Call with a Strike price Rs. 4100
at a premium of Rs. 170.45 and he sells a Nifty Call
option with a strike price Rs. 4400 at a premium of
Rs. 35.40. The net debit here is Rs. 135.05 which is
also his maximum loss.
Strategy : Buy a Call with a lower strike (ITM) +
Sell a Call with a higher strike (OTM)
Nifty index Current Value 4191.10
Buy ITM Call
Option
Strike Price (Rs.) 4100
Mr. XYZ Pays Premium (Rs.) 170.45
Sell OTM Call
Option
Strike Price (Rs.) 4400
Mr. XYZ
Receives
Premium (Rs.) 35.40
Net Premium Paid
(Rs.)
135.05
Break Even Point
(Rs.)
4235.05
44
The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs. 4100
strike price Call was purchased the breakeven point would have been Rs. 4270.45), reduced
the cost of the trade (if only the Rs. 4100 strike price Call was purchased the cost of the
trade would have been Rs. 170.45), reduced the loss on the trade (if only the Rs. 4150
strike price Call was purchased the loss would have been Rs. 170.45 i.e. the premium of the
Call purchased). However, the strategy also has limited gains and is therefore ideal when
markets are moderately bullish.
The payoff schedule :
On expiry
Nifty Closes
at
Net Payoff from Call
Buy (Rs.)
Net Payoff from
Call Sold (Rs.)
Net Payoff
(Rs.)
3500.00 -170.45 35.40 -135.05
3600.00 -170.45 35.40 -135.05
3700.00 -170.45 35.40 -135.05
3800.00 -170.45 35.40 -135.05
3900.00 -170.45 35.40 -135.05
4000.00 -170.45 35.40 -135.05
4100.00 -170.45 35.40 -135.05
4200.00 -70.45 35.40 -35.05
4235.05 -35.40 35.40 0
4300.00 29.55 35.40 64.95
4400.00 129.55 35.40 164.95
4500.00 229.55 -64.60 164.95
4600.00 329.55 -164.60 164.95
4700.00 429.55 -264.60 164.95
4800.00 529.55 -364.60 164.95
4900.00 629.55 -464.60 164.95
5000.00 729.55 -564.60 164.95
5100.00 829.55 -664.60 164.95
5200.00 929.55 -764.60 164.95
The payoff chart (Bull Call Spread)
+ =
Buy lower strike Call Sell OTM Call Bull Call Spread
45
STRATEGY 16. BULL PUT SPREAD STRATEGY:
SELL PUT OPTION, BUY PUT OPTION
A bull put spread can be profitable when the stock / index is either range bound or rising.
The concept is to protect the downside of a Put sold by buying a lower strike Put, which acts
as an insurance for the Put sold. The lower strike Put purchased is further OTM than the
higher strike Put sold ensuring that the investor receives a net credit, because the Put
purchased (further OTM) is cheaper than the Put sold. This strategy is equivalent to the Bull
Call Spread but is done to earn a net credit (premium) and collect an income.
If the stock / index rises, both Puts expire worthless and the investor can retain the
Premium. If the stock / index falls, then the investor’s breakeven is the higher strike less
the net credit received. Provided the stock remains above that level, the investor makes a
profit. Otherwise he could make a loss. The maximum loss is the difference in strikes less
the net credit received. This strategy should be adopted when the stock / index trend is
upward or range bound. Let us understand this with an example.
When to Use: When the
investor is moderately
bullish.
Risk: Limited. Maximum
loss occurs where the
underlying falls to the level
of the lower strike or below
Reward: Limited to the net
premium credit. Maximum
profit occurs where
underlying rises to the level
of the higher strike or
above.
Breakeven: Strike Price of
Short Put – Net Premium
Received
Example:
Mr. XYZ sells a Nifty Put option with a strike price of
Rs. 4000 at a premium of Rs. 21.45 and buys a
further OTM Nifty Put option with a strike price Rs.
3800 at a premium of Rs. 3.00 when the current
Nifty is at 4191.10, with both options expiring on
31st July.
Strategy : Sell a Put + Buy a Put
Nifty Index Current Value 4191.10
Sell Put Option Strike Price (Rs.) 4000
Mr. XYZ Receives Premium (Rs.) 21.45
Buy Put Option Strike Price (Rs.) 3800
Mr. XYZ Pays Premium (Rs.) 3.00
Net Premium
Received (Rs.)
18.45
Break Even Point
(Rs.)
3981.55
46
The strategy earns a net income for the investor as well as limits the downside risk of a Put
sold.
The payoff schedule
On expiry Nifty
Closes at
Net Payoff from Put
Buy (Rs.)
Net Payoff from
Put Sold (Rs.)
Net Payoff
(Rs.)
3500.00 297.00 -478.55 -181.55
3600.00 197.00 -378.55 -181.55
3700.00 97.00 -278.55 -181.55
3800.00 -3.00 -178.55 -181.55
3900.00 -3.00 -78.55 -81.55
3981.55 -3.00 3.00 0.00
4000.00 -3.00 21.45 18.45
4100.00 -3.00 21.45 18.45
4200.00 -3.00 21.45 18.45
4300.00 -3.00 21.45 18.45
4400.00 -3.00 21.45 18.45
4500.00 -3.00 21.45 18.45
4600.00 -3.00 21.45 18.45
4700.00 -3.00 21.45 18.45
4800.00 -3.00 21.45 18.45
The payoff chart (Bull Put Spread)
+ =
Buy lower strike Put Sell OTM Put Bull Put Spread
47
STRATEGY 17 : BEAR CALL SPREAD
STRATEGY: SELL ITM CALL, BUY OTM CALL
The Bear Call Spread strategy can be adopted when the investor feels that the stock / index
is either range bound or falling. The concept is to protect the downside of a Call Sold by
buying a Call of a higher strike price to insure the Call sold. In this strategy the investor
receives a net credit because the Call he buys is of a higher strike price than the Call sold.
The strategy requires the investor to buy out-of-the-money (OTM) call options while
simultaneously selling in-the-money (ITM) call options on the same underlying stock index.
This strategy can also be done with both OTM calls with the Call purchased being higher
OTM strike than the Call sold. If the stock / index falls both Calls will expire worthless and
the investor can retain the net credit. If the stock / index rises then the breakeven is the
lower strike plus the net credit. Provided the stock remains below that level, the investor
makes a profit. Otherwise he could make a loss. The maximum loss is the difference in
strikes less the net credit received. Let us understand this with an example.
When to use: When the
investor is mildly
bearish on market.
Risk: Limited to the
difference between the
two strikes minus the net
premium.
Reward: Limited to the
net premium received for
the position i.e.,
premium received for the
short call minus the
premium paid for the
long call.
Break Even Point:
Lower Strike + Net credit
Example:
Mr. XYZ is bearish on Nifty. He sells an ITM call option
with strike price of Rs. 2600 at a premium of Rs. 154
and buys an OTM call option with strike price Rs. 2800
at a premium of Rs. 49.
Strategy : Sell a Call with a lower strike (ITM)
+ Buy a Call with a higher strike (OTM)
Nifty index Current Value 2694
Sell ITM Call
Option
Strike Price (Rs.) 2600
Mr. XYZ
receives
Premium (Rs.) 154
Buy OTM Call
Option
Strike Price (Rs.) 2800
Mr. XYZ pays Premium (Rs.) 49
Net premium received
(Rs.)
105
Break Even Point (Rs.) 2705
48
The strategy earns a net income for the investor as well as limits the downside risk of a Call
sold.
On expiry
Nifty Closes
at
Net Payoff from Call
Sold (Rs.)
Net Payoff from Call
bought (Rs.)
Net Payoff
(Rs.)
2100 154 -49 105
2200 154 -49 105
2300 154 -49 105
2400 154 -49 105
2500 154 -49 105
2600 154 -49 105
2700 54 -49 5
2705 49 -49 0
2800 -46 -49 -95
2900 -146 51 -95
3000 -246 151 -95
3100 -346 251 -95
3200 -446 351 -95
3300 -546 451 -95
The payoff chart (Bear Call Spread)
+ =
Sell lower strike Call Buy OTM Call Bear Call Spread
49
STRATEGY 18 : BEAR PUT SPREAD STRATEGY:
BUY PUT, SELL PUT
This strategy requires the investor to buy an in-the-money (higher) put option and sell an
out-of-the-money (lower) put option on the same stock with the same expiration date. This
strategy creates a net debit for the investor. The net effect of the strategy is to bring down
the cost and raise the breakeven on buying a Put (Long Put). The strategy needs a Bearish
outlook since the investor will make money only when the stoc k price / index falls. The
bought Puts will have the effect of capping the investor’s downside. While the Puts sold will
reduce the investors costs, risk and raise breakeven point (from Put exercise point of view).
If the stock price closes below the out-of-the-money (lower) put option strike price on the
expiration date, then the investor reaches maximum profits. If the stock price increases
above the in-the-money (higher) put option strike price at the expiration date, then the
investor has a maximum loss potential of the net debit.
When to use: When you
are moderately bearish on
market direction
Risk: Limited to the net
amount paid for the spread.
i.e. the premium paid for
long position less premium
received for short positio n.
Reward: Limited to the
difference between the two
strike prices minus the net
premium paid for the
position.
Break Even Point: Strike
Price of Long Put – Net
Premium Paid
Example:
Nifty is presently at 2694. Mr. XYZ expects Nifty to
fall. He buys one Nifty ITM Put with a strike price
Rs. 2800 at a premium of Rs. 132 and sells one
Nifty OTM Put with strike price Rs. 2600 at a
premium Rs. 52.
Strategy : BUY A PUT with a higher strike
(ITM) + SELL A PUT with a lower strike (OTM)
Nifty index Current Value 2694
Buy ITM Put Option Strike Price (Rs.) 2800
Mr. XYZ pays Premium (Rs.) 132
Sell OTM Put Option Strike Price (Rs.) 2600
Mr. XYZ receives Premium (Rs.) 52
Net Premium Paid
(Rs.)
80
Break Even Point
(Rs.)
2720
50
The Bear Put Spread Strategy has raised the breakeven point (if only the Rs. 2800 strike
price Put was purchased the breakeven point would have been Rs. 2668), reduced the cost
of the trade (if only the Rs. 2800 strike price Put was purchased the cost of the trade would
have been Rs. 132), reduced the loss on the trade (if only the Rs. 2800 strike price Put was
purchased the loss would have been Rs. 132 i.e. the premium of the Put purchased).
However, the strategy also has limited gains and is therefore ideal when markets are
moderately bearish.
The payoff schedule
On expiry Nifty
closes at
Net Payoff from
Put Buy (Rs.)
Net Payoff from
Put Sold (Rs.)
Net payoff
(Rs.)
2200 468 -348 120
2300 368 -248 120
2400 268 -148 120
2500 168 -48 120
2600 68 52 120
2720 -52 52 0
2700 -32 52 20
2800 -132 52 -80
2900 -132 52 -80
3000 -132 52 -80
3100 -132 52 -80
The payoff chart (Bear Put Spread)
+ =
Sell lower strike Put Buy Put Bear Put Spread
51
STRATEGY 19: LONG CALL BUTTERFLY: SELL 2
ATM CALL OPTIONS, BUY 1 ITM CALL
OPTION AND BUY 1 OTM CALL OPTION.
A Long Call Butterfly is to be adopted when the investor is expecting very little movement in
the stock price / index. The investor is looking to gain from low volatility at a low cost. The
strategy offers a good risk / reward ratio, together with low cost. A long butterfly is similar
to a Short Straddle except your losses are limited. The strategy can be done by selling 2
ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options (there should be equidistance
between the strike prices). The result is positive incase the stock / index remains range
bound. The maximum reward in this strategy is however restricted and takes place when
the stock / index is at the middle strike at expiration. The maximum losses are also limited.
Let us see an example to understand the strategy.
When to use: When the
investor is neutral on
market direction and
bearish on volatility.
Risk Net debit paid.
Reward Difference
between adjacent strikes
minus net debit
Break Even Point:
Upper Breakeven Point =
Strike Price of Higher
Strike Long Call – Net
Premium Paid
Lower Breakeven Point =
Strike Price of Lower
Strike Long Call + Net
Premium Paid
Example:
Nifty is at 3200. Mr. XYZ expects very little movement in
Nifty. He sells 2 ATM Nifty Call Options with a strike price
of Rs. 3200 at a premium of Rs. 97.90 each, buys 1 ITM
Nifty Call Option with a strike price of Rs. 3100 at a
premium of Rs. 141.55 and buys 1 OTM Nifty Call Option
with a strike price of Rs. 3300 at a premium of Rs. 64. The
Net debit is Rs. 9.75.
STRATEGY : SELL 2 ATM CALL, BUY 1 ITM CALL OPTION
AND BUY 1 OTM CALL OPTION
Nifty index Current Value 3200
Sell 2 ATM Call Option Strike Price (Rs.) 3200
Mr. XYZ receives Premium (Rs.) 195.80
Buy 1 ITM Call Option Strike Price (Rs.) 3100
Mr. XYZ pays Premium (Rs.) 141.55
Buy 1 OTM Call Option Strike Price (Rs.) 3300
Mr. XYZ pays Premium (Rs.) 64
Break Even Point
(Rs.)
3290.25
Break Even Point
(Lower) (Rs.)
3109.75
52
The Payoff Schedule
On expiry
Nifty
Closes at
Net Payoff from
2 ATM Calls Sold
(Rs.)
Net Payoff from 1
ITM Call purchased
(Rs.)
Net Payoff from 1
OTM Call purchased
(Rs.)
Net Payoff
(Rs.)
2700.00 195.80 -141.55 -64 -9.75
2800.00 195.80 -141.55 -64 -9.75
2900.00 195.80 -141.55 -64 -9.75
3000.00 195.80 -141.55 -64 -9.75
3100.00 195.80 -141.55 -64 -9.75
3109.75 195.80 -131.80 -64 0
3200.00 195.80 -41.55 -64 90.25
3290.25 15.30 48.70 -64 0
3300.00 -4.20 58.45 -64 -9.75
3400.00 -204.20 158.45 36 -9.75
3500.00 -404.20 258.45 136 -9.75
3600.00 -604.20 358.45 236 -9.75
3700.00 -804.20 458.45 336 -9.75
3800.00 -1004.20 558.45 436 -9.75
3900.00 -1204.20 658.45 536 -9.75
The payoff chart (Long Call Butterfly)
+ + =
Buy Lower Sell middle Sell middle Buy higher Long Call
Strike Call strike call strike call strike call Butterfly
53
STRATEGY 20 : SHORT CALL BUTTERFLY: BUY
2 ATM CALL OPTIONS, SELL 1 ITM CALL
OPTION AND SELL 1 OTM CALL OPTION.
A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call
Butterfly, which is a range bound strategy. The Short Call Butterfly can be constructed by
Selling one lower striking in-the-money Call, buying two at-the-money Calls and selling
another higher strike out-of-the-money Call, giving the investor a net credit (therefore it is
an income strategy). There should be equal distance between each strike. The resulting
position will be profitable in case there is a big move in the stock / index. The maximum risk
occurs if the stock / index is at the middle strike at expiration. The maximum profit occurs if
the stock finishes on either side of the upper and lower strike prices at expiration. However,
this strategy offers very small returns when compared to straddles, strangles with only
slightly less risk. Let us understand this with an example.
When to use: You are
neutral on market
direction and bullish on
volatility. Neutral means
that you expect the market
to move in either direction –
i.e. bullish and bearish.
Risk Limited to the net
difference between the
adjacent strikes (Rs. 100 in
this example) less the
premium received for the
position.
Reward Limited to the net
premium received for the
option spread.
Break Even Point:
Upper Breakeven Point =
Strike Price of Highest Strike
Short Call – Net Premium
Received
Lower Breakeven Point =
Strike Price of Lowest Strike
Short Call + Net Premium
Received
Example:
Nifty is at 3200. Mr. XYZ expects large volatility in the
Nifty irrespective of which direction the movement is,
upwards or downwards. Mr. XYZ buys 2 ATM Nifty Call
Options with a strike price of Rs. 3200 at a premium of
Rs. 97.90 each, sells 1 ITM Nifty Call Option with a strike
price of Rs. 3100 at a premium of Rs. 141.55 and sells 1
OTM Nifty Call Option with a strike price of Rs. 3300 at a
premium of Rs. 64. The Net Credit is Rs. 9.75.
STRATEGY
BUY 2 ATM CALL OPTIONS, SELL 1 ITM CALL OPTION AND
SELL 1 OTM CALL OPTION.
Nifty index Current Market Price 3200
Buy 2 ATM Call Option Strike Price (Rs.) 3200
Mr. XYZ pays Premium (Rs.) 195.80
Sells 1 ITM Call Option Strike Price (Rs.) 3100
Mr. XYZ receives Premium (Rs.) 141.55
Sells 1 OTM Call Option Strike Price (Rs.) 3300
Mr. XYZ receives Premium (Rs.) 64
Break Even Point
(Upper) (Rs.)
3290.25
Break Even Point
(Lower) (Rs.) 3109.75
54
The Payoff Schedule
On expiry
Nifty Closes
at
Net Payoff from
2 ATM Calls
Purchased (Rs.)
Net Payoff
from 1 ITM
Call sold (Rs.)
Net Payoff from
1 OTM Call sold
(Rs.)
Net Payoff
(Rs.)
2700.00 -195.80 141.55 64.00 9.75
2800.00 -195.80 141.55 64.00 9.75
2900.00 -195.80 141.55 64.00 9.75
3000.00 -195.80 141.55 64.00 9.75
3100.00 -195.80 141.55 64.00 9.75
3109.75 -195.80 131.80 64.00 0
3200.00 -195.80 41.55 64.00 -90.25
3290.25 -15.30 -48.70 64.00 0
3300.00 4.20 -58.45 64.00 9.75
3400.00 204.20 -158.45 -36.00 9.75
3500.00 404.20 -258.45 -136.00 9.75
3600.00 604.20 -358.45 -236.00 9.75
3700.00 804.20 -458.45 -336.00 9.75
3800.00 1004.20 -558.45 -436.00 9.75
3900.00 1204.20 -658.45 -536.00 9.75
The payoff chart (Short Call Butterfly)
+ + =
Sell Lower Buy middle Buy middle Sell higher Short Call
Strike Call strike call strike call strike call Butterfly
55
STRATEGY 21: LONG CALL CONDOR: BUY 1 ITM
CALL OPTION (LOWER STRIKE), SELL 1 ITM CALL
OPTION (LOWER MIDDLE), SELL 1 OTM CALL
OPTION (HIGHER MIDDLE), BUY 1 OTM CALL
OPTION (HIGHER STRIKE)
A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two
middle sold options have different strikes. The profitable area of the pay off profile is wider
than that of the Long Butterfly (see pay-off diagram).
The strategy is suitable in a range bound market. The Long Call Condor involves buying 1
ITM Call (lower strike), selling 1 ITM Call (lower middle), selling 1 OTM call (higher middle)
and buying 1 OTM Call (higher strike). The long options at the outside strikes ensure that
the risk is capped on both the sides. The resulting position is profitable if the stock / index
remains range bound and shows very little volatility. The maximum profits occur if the stock
finishes between the middle strike prices at expiration. Let us understand this with an
example.
When to Use: When an
investor believes that the
underlying market will
trade in a range with low
volatility until the options
expire.
Risk Limited to the
minimum of the difference
between the lower strike
call spread less the higher
call spread less the total
premium paid for the
condor.
Reward Limited. The
maximum profit of a long
condor will be realized
when the stock is trading
between the two middle
strike prices.
Break Even Point:
Upper Breakeven Point =
Highest Strike – Net Debit
Lower Breakeven Point =
Lowest Strike + Net Debit
Example: Nifty is at 3600. Mr. XYZ expects little volatility
in the Nifty and expects the market to remain
rangebound. Mr. XYZ buys 1 ITM Nifty Call Options with a
strike price of Rs. 3400 at a premium of Rs. 41.25, sells 1
ITM Nifty Call Option with a strike price of Rs. 3500 at a
premium of Rs. 26, sells 1 OTM Nifty Call Option with a
strike price of Rs. 3700 at a premium of Rs. 9.80 and buys
1 OTM Nifty Call Option with a strike price of Rs. 3800 at
a premium of Rs. 6.00. The Net debit is Rs. 11.45 which is
also the maximum possible loss.
STRATEGY : BUY 1 ITM CALL OPTION (LOWER
STRIKE), SELL 1 ITM CALL OPTION (LOWER MIDDLE),
SELL 1 OTM CALL OPTION (HIGHER MIDDLE), BUY 1
OTM CALL OPTION (HIGHER STRIKE)
Nifty index Current Value 3600
Buy 1 ITM Call Option Strike Price (Rs.) 3400
Mr. XYZ pays Premium (Rs.) 41.25
Sell 1 ITM Call Option Strike Price (Rs.) 3500
Mr. XYZ receives Premium (Rs.) 26.00
Sell 1 OTM Call Option Strike Price (Rs.) 3700
Mr. XYZ receives Premium (Rs.) 9.80
Buy 1 OTM Call Option Strike Price (Rs.) 3800
Mr. XYZ pays Premium (Rs.) 6.00
Break Even Point
(Upper) (Rs.)
3788.55
Break Even Point
(Lower) (Rs.)
3411.45
56
Example :
Suppose Nifty is at 3600 in June. An investor enters a condor trade by buying a Rs. 3400
strike price call at a premium of Rs. 41.25, sells a Rs. 3500 strike price call at a premium of
Rs. 26. sells another call at a strike price of Rs. 3700 at a premium of Rs. 9.80 and buys a
call at a strike price of Rs. 3800 at a premium of Rs. 6. The net debit from the trades is Rs.
11.45. This is also his maximum loss.
To further see why Rs. 11.45 is his maximum possible loss, lets examine what happens
when Nifty falls to 3200 or rises to 3800 on expiration.
At 3200, all the options expire worthless, so the initial debit taken of Rs. 11.45 is the
investors maximum loss.
At 3800, the long Rs. 3400 call earns Rs. 358.75 (Rs. 3800 – Rs. 3400 – Rs. 41.25). The
two calls sold result in a loss of Rs. 364.20 (The call with strike price of Rs. 3500 makes a
loss of Rs. 274 and the call with strike price of Rs. 3700 makes a loss of Rs. 90.20). Finally,
the call purchased with a strike price of Rs. 3800 expires worthless resulting in a loss of Rs.
6 (the premium). Total loss (Rs. 358.75 – Rs. 364.20 – Rs. 6) works out to Rs. 11.45. Thus,
the long condor trader still suffers the maximum loss that is equal to the initial debit taken
when entering the trade.
The Payoff Schedule
On expiry
Nifty
Closes at
Net Payoff
from 1ITM
Call
purchased
(Rs.)
Net Payoff
from 1
ITM Call
sold (Rs.)
Net Payoff
from 1
OTM Call
sold (Rs.)
Net Payoff
from 1 OTM
Call
purchased
(Rs.)
Net Payoff
(Rs.)
3000.00 -41.25 26 9.80 -6 -11.45
3100.00 -41.25 26 9.80 -6 -11.45
3200.00 -41.25 26 9.80 -6 -11.45
3300.00 -41.25 26 9.80 -6 -11.45
3400.00 -41.25 26 9.80 -6 -11.45
3411.45 -29.80 26 9.80 -6 0.00
3500.00 58.75 26 9.80 -6 88.55
3600.00 158.75 -74 9.80 -6 88.55
3700.00 258.75 -174 9.80 -6 88.55
3788.55 347.30 -263 -78.8 -6 0.00
3800.00 358.75 -274 -90.2 -6 -11.45
3900.00 458.75 -374 -190.2 94 -11.45
4000.00 558.75 -474 -290.2 194 -11.45
4100.00 658.75 -574 -390.2 294 -11.45
4200.00 758.75 -674 -490.2 394 -11.45
57
If instead on expiration of the contracts, Nifty is still at 3600, the Rs. 3400 strike price call
purchased and Rs. 3700 strike price call sold earns money while the Rs. 3500 strike price
call sold and Rs. 3800 strike price call sold end in losses.
The Rs. 3400 strike price call purchased earns Rs. 158.75 (Rs. 200 – Rs. 41.25). The Rs.
3700 strike price call sold earns the premium of Rs. 9.80 since it expires worthless and does
not get exercised. The Rs. 3500 strike price call sold ends up with a loss of Rs. 74 as the call
gets exercised and the Rs. 3800 strike price call purchased will expire worthless resulting in
a loss of Rs. 6.00 (the premium). The total gain comes to Rs. 88.55 which is also the
maximum gain the investor can make with this strategy.
The maximum profit for the condor trade may be low in relation to other trading strategies
but it has a comparatively wider profit zone. In this example, maximum profit is achieved if
the underlying stock price at expiration is anywhere between Rs. 3500 and Rs. 3700.
The payoff chart (Long Call Condor)
+ + =
Buy Lower Sell middle Sell middle Buy higher Long Call
Strike Call strike call strike call strike call Condor
58
STRATEGY 22 : SHORT CALL CONDOR : SHORT 1
ITM CALL OPTION (LOWER STRIKE), LONG 1 ITM
CALL OPTION (LOWER MIDDLE), LONG 1 OTM CALL
OPTION (HIGHER MIDDLE), SHORT 1 OTM CALL
OPTION (HIGHER STRIKE).
A Short Call Condor is very similar to a short butterfly strategy. The difference is that the
two middle bought options have different strikes. The strategy is suitable in a volatile
market. The Short Call Condor involves selling 1 ITM Call (lower strike), buying 1 ITM Call
(lower middle), buying 1 OTM call (higher middle) and selling 1 OTM Call (higher strike).
The resulting position is profitable if the stock / index shows very high volatility and there is
a big move in the stock / index. The maximum profits occur if the stock / index finishes on
either side of the upper or lower strike prices at expiration. Let us understand this with an
example.
When to Use: When an
investor believes that the
underlying market will
break out of a trading
range but is not sure in
which direction.
Risk Limited. The
maximum loss of a short
condor occurs at the
center of the option
spread.
Reward Limited. The
maximum profit of a short
condor occurs when the
underlying stock / index is
trading past the upper or
lower strike prices.
Break Even Point:
Upper Break even Point
= Highest Strike – Net
Credit
Lower Break Even Point
= Lowest Strike + Net
Credit
Example: Nifty is at 3600. Mr. XYZ expects high volatility
in the Nifty and expects the market to break open
significantly on any side. Mr. XYZ sells 1 ITM Nifty Call
Options with a strike price of Rs. 3400 at a premium of
Rs. 41.25, buys 1 ITM Nifty Call Option with a strike
price of Rs. 3500 at a premium of Rs. 26, buys 1 OTM
Nifty Call Option with a strike price of Rs. 3700 at a
premium of Rs. 9.80 and sells 1 OTM Nifty Call Option
with a strike price of Rs. 3800 at a premium of Rs. 6.00.
The Net credit is of Rs. 11.45.
STRATEGY : SHORT 1 ITM CALL OPTION (LOWER
STRIKE), LONG 1 ITM CALL OPTION (LOWER MIDDLE),
LONG 1 OTM CALL OPTION (HIGHER MIDDLE), SHORT
1 OTM CALL OPTION (HIGHER STRIKE)
Nifty index Current Value 3600
Sell 1 ITM Call Option Strike Price (Rs.) 3400
Premium (Rs.) 41.25
Buy 1 ITM Call Option Strike Price (Rs.) 3500
Premium (Rs.) 26.00
Buy 1 OTM Call Option Strike Price (Rs.) 3700
Premium (Rs.) 9.80
Sell 1 OTM Call Option Strike Price (Rs.) 3800
Premium (Rs.) 6.00
Break Even Point
(Upper) (Rs.)
3788.55
Break Even Point
(Lower) (Rs.)
3411.45
59
The Payoff Schedule:
On expiry
Nifty
Closes at
Net Payoff
from 1 ITM
Call sold (Rs.)
Net Payoff from
1 ITM Call
purchased (Rs.)
Net Payoff
from 1 OTM
Call purchased
(Rs.)
Net Payoff
from 1 OTM
Call sold
(Rs.)
Net
Payoff
(Rs.)
3000.00 41.25 -26 -9.80 6 11.45
3100.00 41.25 -26 -9.80 6 11.45
3200.00 41.25 -26 -9.80 6 11.45
3300.00 41.25 -26 -9.80 6 11.45
3400.00 41.25 -26 -9.80 6 11.45
3411.45 29.80 -26 -9.80 6 0
3500.00 -58.75 -26 -9.80 6 -88.55
3600.00 -158.75 74 -9.80 6 -88.55
3700.00 -258.75 174 -9.80 6 -88.55
3788.55 -347.30 263 78.75 6 0
3800.00 -358.75 274 90.20 6 11.45
3900.00 -458.75 374 190.20 -94 11.45
4000.00 -558.75 474 290.20 -194 11.45
4100.00 -658.75 574 390.20 -294 11.45
4200.00 -758.75 674 490.20 -394 11.45
The payoff chart (Short Call Condor)
+ + =
Sell Lower Buy middle Buy middle Sell higher Short Call
Strike Call strike call strike call strike call Condor

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Posted by on August 25, 2018 in Uncategorized

 
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The Chicken You Eat is Being Pumped With Antibiotics Meant for Critically-ill Patients

Chickens raised in India have been dosed with some of the strongest antibiotics known to medicine that can have repercussions on human health.

A study by The Bureau of Investigative Journalism, an independent, non-profit media organization, has found that hundreds of tonnes of Colistin – an antibiotic of last resort – ship to India for the routine treatment of chickens.

In its report, The Bureau of Investigative Journalism has said that, “Indian poultry farming is creating global superbugs”.

The report which was published on the The Bureau of Investigative Journalism website claims that, “Colisti, an antibiotic, is given to the birds [chickens] to protect them against diseases or to make them gain weight faster so more can be grown each year at greater profit.”

The website has quoted Professor Walsh, an adviser to the UN on antimicrobial resistance, who says that Colistin should be treated “as an environmental toxin”.

“Colistin should only be used on very sick patients. Under any other circumstances it should be thought of and treated as an environmental toxin. It should be labelled as such. It should not be exported all over the world to be used in chicken feed,” Professor Walsh was quoted in the report.

Colistin, which doctors call as the “last hope” antibiotic, is used to treat patients who are critically ill with infections, including pneumonia, which cannot be treated by other medicines. The World Health Organisation has called for the use of such antibiotics, which it calls “critically important to human medicine”, to be restricted in animals and banned as growth promoters.

According to the Bureau of Investigative Journalism, “India [has] at least five animal pharmaceutical companies [that] are openly advertising products containing Colistin as growth promoters.”

One of the main affects of Colistin is that is makes human bodies drug resistant.

The World Health Organisation has called drug resistance one of the biggest threats to global health, food security, and development. Currently the problem is thught to kill 700,000 people worldwide.

 

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Your Tandoori Chicken Could Be Making You Resistant To Antibiotics

67% of the poultry farms tested used antimicrobials as growth boosters—despite a government ban.

‘m a vegetarian, but most of my friends and family love chicken, which means that I’ve tagged along with them to buy chicken over the years (not my favourite activity). One thing I’ve noticed is that the chickens today seem much larger than the ones people bought when I was a kid. This led me to do some research, and what I found out was that poultry in India are regularly fed a concoction of antibiotics to make them larger! But antibiotics are prescription drugs for a good reason. They have some serious side effects.

The Hindustan Times recently carried an article about how poultry, especially chickens, are fed antibiotic growth promoters. The article noted that this practice has serious health implications since it contributes to the growth of drug-resistant bacteria. The article was based on a study conducted by the Centre for Disease Dynamics, Economics & Policy. The study found that 67% of the farms tested used antimicrobials as growth boosters. The study concluded that this has potentially deadly consequences for India since this practice contributes to the growth of antibiotic-resistant bacteria. The article also notes that most Indians are completely unaware of the fact that their chicken is being pumped with antibiotics.

Although cooking at high temperatures kills the bacteria in the meat, it doesn’t get rid of some of the antibiotic residues, which could then cause side effects associated with excessive antibiotic use…
The study also found another disturbing side effect of feeding poultry antibiotics. The same Hindustan Times article includes an interview with the Director of the Centre for Disease Dynamics, Economics & Policy, Ramanan Laxminarayan. He points out that workers on poultry farms can get infected by drug-resistant bacteria either by breathing them in or through exposed body parts like uncovered feet. The infected workers can then end up spreading the infection, potentially causing a drug-resistant epidemic.

Another article about the same study, this one published by Bloomberg, noted that, as a result of continuous ingestion of antibiotics, 87% of the broiler poultry tested carried bacteria that produced enzymes which destroy most penicillin and cephalosporin-based antibiotics. The corresponding figure for egg-laying hens was 47%, which is also an unacceptably high number.

Another problem with pumping poultry (or for that matter any other animals meant for human consumption) with antibiotics, is that although cooking at high temperatures kills the bacteria in the meat, it doesn’t get rid of some of the antibiotic residues, which could then cause side effects associated with excessive antibiotic use such as adverse drug reactions, and an increased risk of colonisation and infection with multidrug-resistant organisms.

If this practice is so widespread and unsafe, the government should do something about it, right? Guess what, it has! The use of antibiotics in animal feed was banned way back in 2014!

The fact that, even after a ban, the practice of using antibiotics in poultry feed is still widespread three years later is extremely disturbing. The Central and state governments must figure out a way to ensure the strict implementation of this ban. If this problem isn’t dealt with, we are looking at the very real possibility of a drug-resistant epidemic.

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Posted by on July 28, 2018 in Uncategorized

 

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Most countries still using crucial antibiotics to make animals fatter

Most countries are still using vital antibiotics which should only be used to treat humans to make animals grow faster, fuelling antibiotic resistance, a United Nations report has found.

Antibiotics are widely used in agriculture around the world to prevent or treat disease and make animals grow faster. The latter practice, which is banned in the EU and US, can create bacteria that are resistant to antibiotics, known as superbugs. These can spread via contact with animals, farmers, in the environment and in food and infect humans.

Superbugs are estimated to kill 700,000 people worldwide and antibiotic resistance has been called one of the greatest threats to public health.

Of particular concern is the use of antibiotics that are critical for treating humans as growth promoters for animals. The new report, jointly produced by the World Health Organisation (WHO), Food and Agriculture organisation (FAO) and World Organisation for Animal Health (OiE), says only 42% of countries have limited their use for growth promotion. The majority of these are in Europe, while only a fraction of countries in Africa and the Americas have taken these steps.

“Progress is a bit too slow. It needs to go faster,” said Henk Jan Ormel, a senior policy advisor to the FAO’s Chief Veterinary Officer, referring to the number of countries that are yet to introduce regulations to limit antibiotic use in agriculture.

He pointed to “chronic underinvestment in the animal, plant, food and agriculture sectors” that has led to a lack of alternatives to using antibiotics for farmers, such as access to better feed and better animal husbandry. Speaking at a conference on the report, he urged every country to phase out the use of antibiotics for growth promotion in animal production.

Earlier this year, an investigation by the Bureau revealed how one of India’s biggest poultry companies was dosing its chickens with one of the highest priority antibiotics. The antibiotic, colistin, is called a ‘last resort’ drug by experts as it used to treat some of the most resistant infections in humans. Yet it is also given to the chickens to make them grow faster.

The UN report also warned of antibiotics leaking from pharmaceutical factories. Only 10 countries have regulations in place to limit antibiotics escaping in waste from the factories that produce them. “This level of regulation is insufficient to protect the environment from the hazards of antimicrobial production,” the report said.

Only eight out of 18 major pharmaceutical companies set limits for how much antibiotic residue could be released in wastewater, a previous report from the independent not-for-profit body, the Access to Medicine Foundation found in January 2018.

Last year the Bureau reported on a study which revealed “excessively high” levels of antimicrobial drugs – as well as superbugs – in waste water from a major drug production hub in the Indian city of Hyderabad. The quantities found were strong enough to treat patients, scientists said.

While the majority of low income countries have taken some steps to raise awareness of the growing threat of superbugs from overuse of antibiotics in human medicine, information about other sources of resistant bacteria remains limited. Almost a third of low income countries had not run campaigns to raise awareness of superbugs developing from agriculture, food production and the environment, compared to 4% of high income countries, the UN report found.

 

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A game of chicken: how Indian poultry farming is creating global superbugs

On a farm in the Rangareddy district in India, near the southern metropolis of Hyderabad, a clutch of chicks has just been delivered. Some 5,000 birds peck at one another, loitering around a warehouse which will become cramped as they grow. Outside the shed, stacks of bags contain the feed they will eat during their five-week-long lives. Some of them gulp down a yellow liquid from plastic containers – a sugar water fed to the chicks from the moment they arrive, the farm caretaker explains. “Now the supervisor will come,” she adds, “and we will have to start with whatever medicines he would ask us to give the chicks.”

The medicines are antibiotics, given to the birds to protect them against diseases or to make them gain weight faster so more can be grown each year at greater profit. One drug typically given this way is colistin. Doctors call it the “last hope” antibiotic because it is used to treat patients who are critically ill with infections which have become resistant to nearly all other drugs. The World Health Organisation has called for the use of such antibiotics, which it calls “critically important to human medicine”, to be restricted in animals and banned as growth promoters. Their continued use in farming increases the chance bacteria will develop resistance to them, leaving them useless when treating patients.

Yet thousands of tonnes of veterinary colistin was shipped to countries including Vietnam, India, South Korea and Russia in 2016, the Bureau can reveal. In India at least five animal pharmaceutical companies are openly advertising products containing colistin as growth promoters.

One of these companies, Venky’s, is also a major poultry producer. Apart from selling animal medicines and creating its own chicken meals, it also supplies meat directly and indirectly to fast food chains in India such as KFC, McDonald’s, Pizza Hut and Dominos.
In Britain, Venky’s is best known for having bought the football club Blackburn Rovers in 2010. They made a TV advert showing the team eating a Venky’s chicken dinner before playing a match with the slogan “Good for you”. Since then Blackburn Rovers has dropped out of the Premiership, been relegated again, and is now in the third tier of English football – with fans protesting the club’s decline.

Venky’s sells colistin to farmers in India as a growth promoter. It comes in bags with pictures of happy-looking chickens on the packet. Instructions say the product “improves weight gain” and 50 grams should be added to each ton of chicken feed. The Bureau bought 200g of Venky’s-branded colistin – Colis V – over the counter from a poultry feed and medicines shop in Bangalore without a prescription. In Europe colistin is only available to farmers if prescribed by a vet for the treatment of sick animals.

Venky’s is not breaking any laws in India by selling colistin and it said it will comply with any future regulatory changes. The company told the Bureau: “Our antibiotic products are for therapeutic use – although some of these in mild doses can be used at a preventive level, which in turn may act as growth promoters […]We do not encourage indiscriminate use of antibiotics.”
Venky’s also exported colistin to Nepal and Yemen last year, customs data show. Other poultry companies are selling colistin products or importing it for use on farms, according to the data. Venky’s also exported the product to Nepal and Yemen last year, customs data show.

Venky’s also told the Bureau that on their own farms and those of their contractors “antibiotics are used only for therapeutic purpose”.

McDonalds, KFC, Pizza Hut and Dominos said the chicken they source from Venky’s is not raised on growth promoting antibiotics and their suppliers follow their policies controlling their use of antibiotics.
McDonald’s has pledged to phase out the use of critically important antibiotics by 2018 for markets including the European Union (EU) and US – with an extra year for phasing out colistin in Europe. KFC has made a similar promise about its US supply chains. They have promised to do the same in India but without giving any timeframe, a move the Delhi-based Centre for Science and Environment has labelled ‘double standards’. Only Jubilant FoodWorks (which owns Domino’s) has set a date, of 2019, to start phasing out the drugs.

“Colistin is the last line of defence… Giving it to chickens as feed is crazy.”
Timothy Walsh, a global expert on antibiotic resistance, called the Bureau’s findings about the ready availability of colistin in India “deeply worrying” and described the use of colistin in poultry farming as “complete and utter madness”. Walsh, who is Professor of Medical Microbiology at Cardiff University, and his Chinese colleagues discovered a colistin-resistant gene in Chinese pigs in 2015. The gene, mcr-1, could be transferred within and between species of bacteria. That meant that microbes did not have to develop resistance themselves, they could become resistant just by acquiring the mcr-1 gene.
The discovery was met with worldwide panic in the medical community as it meant the resistance could be passed to bugs which are already multi-drug resistant, leading to untreatable infections. Rampant use of the drug in livestock farming has been cited as the most likely way mcr-1 was spread. It has been detected in bacteria from animals and humans in more than 30 countries, spanning four continents. Another four colistin resistant genes (mcr-2 to mcr-5) have been discovered since. Colistin-resistant bacteria, once rare, are now widespread.

“Colistin is the last line of defence”, said Professor Walsh, who is also an adviser to the UN on antimicrobial resistance. “It is the only drug we have left to treat critically ill patients with a carbapenem-resistant infection. Giving it to chickens as feed is crazy.”

“Colistin-resistant bacteria will spread on the chicken farms, in the air surrounding them, contaminate the meat, spread to the farm workers, and through their faeces flies will spread it over large distances”, he continued.

He added: “Colistin should only be used on very sick patients. Under any other circumstances it should be thought of and treated as an environmental toxin. It should be labelled as such. It should not be exported all over the world to be used in chicken feed.”

Professor Dame Sally Davies, England’s chief medical officer, also called for a worldwide ban on the use of not just colistin but all antibiotics as growth promoters. “If we have not banned growth promotion within five years we will have failed the global community”, she told the Bureau.
The global superbug crisis

Drug resistance has been called one of the biggest threats to global health, food security, and development by the World Health Organisation. If antimicrobials stop working, doctors won’t have effective drugs to treat deadly infections. Currently the problem is thought to kill 700,000 people worldwide – one person a minute – though these figures have been disputed by some academics. The death toll is expected to rise to 10 million by 2050 if no action is taken, with 4.7m of those deaths in Asia. Common procedures like joint replacements, Caesarean sections, organ transplants and chemotherapy could also become too risky to carry out.

The Bureau has tracked more than 2,800 tonnes of colistin for use on animals shipped to India, Vietnam, South Korea, Russia, Nepal, Guatemala, Colombia, Bolivia, Mexico and El Salvador in 2016. The total is likely to be higher as the product may be shipped under its brand name rather than being labelled as colistin – and to other countries for which customs data is not made public. By comparison, the UK uses less than a tonne a year of colistin in agriculture.

Colistin is manufactured by two companies in India but the country is also importing at least 150 tonnes of the drug each year.

India has been called the epicentre of the global drug resistance crisis. A combination of factors described as a “perfect storm” have come together to hasten the spread of superbugs. Unregulated sale of the drugs for human or animal use – accessed without prescription or diagnosis – has led to unchecked consumption and misuse. India has a large population, some of whom defecate in the open, and waste is often poured untreated into rivers and lakes. This creates the perfect conditions for bugs to share resistance.

Poor sanitation means people often catch infections that require treatment with antibiotics. Overuse of the drugs in hospitals has created antibiotic resistant hotspots, and poor infection control means these bugs spread within the hospital and into the community. Some of the pharmaceutical companies manufacturing antibiotics have also failed to dispose of antibiotic-ridden waste properly, fuelling the spread of resistant bugs in the environment.

All of these factors have led to high rates of resistance. In India 57 per cent of Klebsiella pneumoniae bacteria – which commonly cause urine, lung and bloodstream infections – are resistant to last line antibiotics known as carbapenems. In the UK by comparison the figure is below one per cent. Doctors in some areas of India see patients with pan-resistant infections (immune to nearly all antibiotics) at least once a month. The government does not collect figures on how many people are dying of resistant infections but one study estimates drug-resistant infections kill 58,000 newborn babies in India every year.

Bugs bred in India spread globally. One which particularly worried scientists is a gene called New Delhi metallo-beta-lactamase 1 (NDM-1), which makes bugs resistant to carbapenem antibiotics. This has been dubbed “the nightmare bacteria” by the Centers for Disease Prevention or Control in the US because it kills half the patients who develop a bloodstream infection.

NDM-1 was first found in a patient who acquired it in India in 2008 and has since spread all over the world, with over 1,100 laboratory confirmed cases in the UK since 2003. It is far from the only one being spread from India. The mcr-1 gene which confers colistin resistance spread round the world in three years. Some 11 per cent of travellers to India came home colonised with mcr-1 bacteria, a recent study found.

You know this is preventable

Dr Sanjeev Singh is a medical superintendent at The Amrita Institute of Medical Sciences in Kochi, India. He has to treat patients with multi-drug resistant infections up to three times a week and patients with pan-drug resistant infections (those immune to nearly all antibiotics) up to twice a month.

“The situation is grim. As a clinical practitioner it becomes extremely difficult to treat a patient with multidrug and pan drug resistant organisms. You feel helpless, despite being able to diagnose the patient, you are left with limited options. This increases the illness and mortality of the patients and cost of the care also shoots up. You have very limited options for treatment only because the rest of the people in the chain, which includes animal industry, policy makers, waste disposal people, have not played their role nicely.”

“You know this is preventable but you see these patients crashing in front of you and dying. If it is happening to a young person who could have been so productive, it pains you. All the people in the chain, if they don’t participate and work as a team, it’s going to be very very difficult.”
Indian poultry: growing fast

In India the poultry industry is booming. The amount of chicken produced doubled between 2003 and 2013. Chicken is popular because it can be eaten by people of all religions (pork is forbidden to Muslims and beef is prohibited to Hindus) and because it is versatile and inexpensive relative to other meats. The majority of poultry is now produced by commercial farms, contracted to major companies like Venky’s. Researchers who tested Indian meat from supermarkets in 2014 found it contained residues of six antibiotics, suggesting they were being used liberally on farms. (The Indian Ministry of Agriculture said the residues were well within the range allowed by other international agencies).

Experts predict the rising demand for protein will cause a surge in antibiotic use in livestock. India’s consumption of antibiotics in chickens is predicted to rise fivefold by 2030 compared to 2010, while globally the amount used in animals is expected to rise by 53 per cent.

The World Health Organisation released guidelines in November 2017 recommending reducing use of critically important antibiotics in food-producing animals and banning their use as growth promoters. It also recommended banning the mass medicating of livestock with antibiotics to prevent disease.

Using antibiotics as growth promoters has been banned in the European Union since 2006, and in the US was made illegal in 2017.

In 2014 India’s ministry of agriculture sent an advisory letter to all state governments asking them to review the use of antibiotic growth promoters. However the directive was non-binding, and none have introduced legislation to date. In its National Action Plan on AMR published in 2017 the Indian government banned using antibiotics as growth promoters. The plan is not currently linked to any regulatory action.

Antibiotics as a substitute for hygiene

Indian farmers use antimicrobials as a substitute for good farming practices, according to Professor Ramanan Laxminarayan, director of the Centre for Disease Dynamics, Economics and Policy, based in Delhi.

“If you go to the average poultry farm in Punjab you see these are all lacking: the nutrition is not there, hygiene is awful. So they are using the antibiotics as a substitute of keeping the animals alive”, he said. The reason this is done is because antibiotics are cheap. “If the true cost was factored in – the cost of resistance – it wouldn’t seem like such a good option”, he added.

He believes consumer pressure rather than regulation is what will drive change. He points out that much of the poultry consumption in India is through direct sales to consumers rather than fast food chains.

“Consumers [in the West] were previously unaware their chicken was being raised on antibiotics and once they found out they didn’t want it”, he said. “In India that level of awareness doesn’t exist. I think it needs social change. It needs leaders, it needs stories, it needs organisation. It’s the same for tobacco, nobody smokes now indoors, nobody smokes around children. The level of awareness is further on than with antibiotics.”

Professor Walsh believes there is no time to waste for this change. “These resistant bugs aren’t waiting around, they are rapidly spreading”, he said. “The antibiotic pipeline is modest at best so we must act quickly to preserve our last-resort drugs. If we don’t act now by 2030 colistin will be dead as a drug. We will have serious drug resistant infections and nothing to use against them.”

 

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6,000% return in 4 years; Delhi investor offers smart tips to pick multibaggers

You need to lose some money in stocks to learn the ropes of the market. This wisdom comes from an investor who is known for picking multibaggers, some of which have swelled up to 6,000 per cent in last four years.

Delhi-based investor Ashish Chugh says stock investing is about being able to look at the big picture, and not about nailing big returns very next quarter.

He looks at the bears as taskmasters, who teach hard lessons. “Every investor needs to go through a bear .. bear market,” he insists.

Known for his ability to spot potential multibaggers early, Chugh says he has learnt the tricks of the trade after “whatever money I made in a bull market was lost in a bear market.”

Chugh’s preferred way of dealing with stocks is what he calls ‘Big Picture’ investing. ..

I am not too keen on identifying stocks that will deliver big the next good quarter. I am on the lookout for companies whose stock prices have got hammered because of one or two bad quarters but have good long-term outlook,” says he.

Some of his ‘pet’ stocks have delivered big returns over the years: NatcoBSE 1.73 % has surged 67 times in less than 10 years, Avanti FeedsBSE -2.53 % has grown 60 times, or 5,900 per cent, in four years.

Chugh took to stock investing seriously in the early 1990s, when a Rs 1,000 investment in the IPO of CadilaBSE -1.13 % Hospital Products grew into Rs 13,000 in two months.

“I was lucky to get allotment. This made me realise that stock market is a place where money does not just add up; it multiplies,” he recalls.

Chugh says his best investment so far was Rs 11,000 he spent in 1992 to subscribe to The Stock Exchange Official Directory by BSE, a compendium in 18 volumes. ..

This enabled him to get balance sheets and other information about all the companies listed on the BSE, which was not so easy to get at that time.

Bears are true teachers
A stock investor needs to go through a few bear markets to evolve as a better investor, says Chugh.
“Bear markets change your perspective about investing. Most investors who have not seen or experienced a bear market would get seduced by rising stock prices and are focused entirely on ..

returns and stock prices. Risk management is not important for them,” says the market veteran.

Chugh is the founder and director of Hidden Gems Advisory.

“A bear market makes you think and rethink your investment style and strategy, sobers you down and you evolve as a mature investor,” he says.

Chugh says he started doing better after witnessing bear markets from 1996 to 1999 and from 2001 to 2003. “My entire focus on investing has since switched from chasi ..

Top multibagger picks
This 49-year-old trader has a knack for spotting multibaggers among microcaps. He picks up stocks that are beaten down because of short-term negatives, but have inherent strength to bounce back once the negatives are out of the way.

Many of the stocks he has picked over the years have risen 50 to 70 times. He picked up Natco PharmaBSE 1.73 % when the stock got hammered down after the company acquired some drug stores in US.
Valuat ..

Future growth is one of the important parameters. A value stock remains a value stock unless there is growth, says he.

Cash flow is another important parameter he watches closely. Most investors think only about returns. But risk management is important because equity investing is less about returns and more about probabilities and risk management, he insists.

Management quality is important
Chugh says while investing in microcap companies, it is ..it is difficult to select a good management as they are not talked or written about too often.

In a number of the multibaggers that he has discovered, the market had initially perceived their managements to be questionable, as these stocks were available at low PEs with small market caps. The perception changed after the stock prices grew 5 to 10 times and large HNI investors and then institutional investors got into these stocks.

Chugh says for him a good management i ..

has high promoter holdings and shares the wealth with investors through share buybacks and dividends.

Often, companies do not pay dividends because of high dividend distribution tax, but uses earnings for regular capital expenditure to scale up a business without equity dilutions. This also enhances shareholder value.

Stocks you are eyeing right now
Chugh refused to talk about his stocks due to Sebi regulations. However, he said: “I am sector agn ..
tocks you are eyeing right now
Chugh refused to talk about his stocks due to Sebi regulations. However, he said: “I am sector agnostic in investing. I keep my eyes and ears open to anything that satisfies my investment criteria, which is about future growth, low valuations owing to curable, short-term negatives or past legacies. I am looking for companies that have done capex in last few years, but it has not started yielding results because of lack of adequate demand or ..

 
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Posted by on July 6, 2017 in Uncategorized

 

Which penny stocks are worth investing in India?

eware of penny stocks. They can make money for you, but if it goes wrong they will only be of 6–9% of your investment. suppose if you took buy position in penny stocks like tuni textile, Trinity trade link 8–10 months ago your Investment of 1000 rs is only of 100 rs in today’s date. But penny stocks can give you good returns like

Morepen labs from 2 to 25 in 2015
Marksans Pharma from 3 to 100 in three years
Indosolar from 1.50 to 15 in 2014
Prakash Constrowell from 2 to 20 in 2016 (well this is new in the list currently in uptreans)
Now come to penny stocks you can buy

3i Infotech now trading at 5.70 for target of 13–16 in 7–9 months
Sybly Industries now trading at 12.50 for target of 20 in 4–5 months.
A large part of my working life was spent at one of India’s biggest brokerage houses in a very senior position. I have also interacted with a large number of insiders from the industry and i know one thing.

Almost no one makes money on trading in penny stocks. You could have beginners luck or a favourable market momentum which might make you some money for a short period or even extended period of time but believe me when the tide turns almost everyone not only lose their profits but also their shirts and pants.

So, please give up the greed. Pick up some good books on value investing if you are really interested in stocks and shares. Get some discipline going into your investment strategy and keep it that way.
To strip your question down to the basics, here is what you are asking: “How can I spend less than INR 60 per stock and get rich!”

Before I get to the answer, let’s assume a few things:

By potential, you mean stocks that have the ability in the future to give decent returns.
By now, you are referring to those stocks that have bottomed out and on the verge of a reversal.
Keeping the above in mind,here’s how you determine the relevant stocks

Make a list of all stocks trading in Both the exchanges currently below INR 60
visit Stock Screener for Indian Stocks: Screener.in
enter the name of the company
Check the trend line for the past 5 years
Look hard at the pros and cons listed
remember that trading in penny stocks is risky and you might loose all capital invested with one bad decision.
here are near to 1000 penny stocks in India listed on BSE mostly but only a few on NSE and only a few are traded on the exchanges as of today. It is important to clarify the meaning of penny stocks.

List of all stocks under Rs. 1 as of Oct 3 2016: Stocks under Rs 1

List of all stocks under Rs. 10 but above Rs. 1 as of Oct 3 2016: Stocks between Rs 1 & 10
Penny stocks are shares of companies that have market capitalization less than Rs.100 crore and each share trading below Rs.10. There are more than 25% of total stocks listed as penny stocks on the BSE and 10% on the NSE. There were over 670 stocks in the Bombay Stock Exchange (BSE) that were trading below Rs 10 on Feb 16. Unitech, Zylog Systems, Velan Hotels, 3I Infotech and Vardhaman Laboratories are some of the stocks, which were trading below Rs 10. Stocks such as Dynacons Technologies which were trading at Rs 0.38 two years back, surged 4,097 per cent, to Rs 15.95 till Feb 16, 2016. As on December 31, 2015, promoters holding in the company was at 60.17 per cent.

Normally, all investors think that penny stocks look like a good grab as the downside seems limited. Penny stocks usually belong to companies with low quality management or negative future outlook. These penny stocks suddenly spring to life with huge volumes when there is an announcement or turnaround in the market scenario, sector or stock specific improvement. There are penny stocks and penny sectors – meaning the sector itself is considered as penny stock sector due to various reasons.

First let me show you the penny stocks and then the penny sectors. I am giving a table of some penny stocks which have given more than 100% returns in less than 150 days.

The reason why penny stocks exist or some stocks become penny stocks is because of PPG: people (management), profitability or growth prospects. Any change in either of these three parameters prompts them to start moving higher or lower.

At the same time there are many stocks which have been reduced to penny status or close to 52 week low. This is today’s list for 52 wk lows.
The reason why penny stocks exist or some stocks become penny stocks is because of PPG: people (management), profitability or growth prospects. Any change in either of these three parameters prompts them to start moving higher or lower.

Now coming to penny sectors, a good example of penny sectors was the sugar industry. This industry was not doing well because of the drought situation and low rainfall in 2014 and 2015, which resulted in all time low for these stocks. No one was interested in these stocks at all and look what they have delivered in less than 6 months. Though they all might not be penny stocks, it was called the penny sector.

A stock is usually considered as penny stock when it is traded below 10 Rs or its market cap is less than 100 Cr.

Allow me to answer this question by asking a question.

Why do people want to invest in penny stock?

We see lot of penny stocks out there which are giving multibaggers even in few months of time. So instead of investing in bigger companies I want to invest in these penny stocks to gain more money in short period of time.
Every big companies start as smaller companies. I will choose a very small company (penny) then hold it for 5 years or 10 years. If this is quality company then it will be a multibagger over period of time.
Usually 95% people invest in penny stocks for quick bucks and 5% people invest because they believe in long term story of the company.

You see Facebook, LinkedIn, twitter that are hugely successful but what you don’t see is there there are uncountable number of companies failed while aiming for big.

Pros:
Penny companies can give multibaggers gains in short period of time.
If you are big investor or tips adviser you can manipulate penny stocks in your favour in a easier way.
If you choose a quality penny stock with experienced management and good future potential pat yourself.
Cons:

Under normal scenario risk is much higher than bigger companies
Failure percentage is much higher. Around 90% company fail to reach big state.
These companies can be easily manipulated
These are usually illiquid companies. When stock starts falling or you decide to sell it , you may not able to do so as there would be no buyer.
Few brokers have more charge to deal with penny stocks
Most of the companies furnish less data to public. Sometime they suprass negative information to sebi. This makes it hard to do proper research on those companies.
Usually share holders get lest attention by board of directors.
So is good to invest in penny stocks?

It depends on you. I do invest partly in penny stocks so here are my tips or suggestions.

Research, research and do more research. It is hard to find quality penny stocks. Screen as many penny stocks as possible.
A company can become big only when it is making profit or increasingly moving towards that direction. Study balance sheet, profit loss statement, RONW, ROCE, all profit margin ratios, debt, promoter holdings.
Check it’s graph over last 5 years of time. If it was moving sidewise for initial phase and now started moving up or it gradually moved up over these period of time then its a good sign.
Must understand the business model and future perspective. Visit the official site, gather all information available for share holders and study.
Never allocate a large part of portfolio for these penny stocks.
Finally choose right sector of such companies.
If you want to become rich investing in stock market, you must understand compounding.

Finally an expected multibagger penny for you.

Sharda Plywood[1]

Example:

Someone I know had invested in about 100 penny stocks (1% of his capital in each stock).
3 out of the 100 became multibaggers and he made approximately 10 times his investment.
Some 50 stocks lost 60% of their value.
Some 45–47 stocks lost 80% of their value.
Net result = His portfolio was in a loss.
He was an avid researcher and thought that one could just put his money in different stocks and become rich. Unfortunately it doesn’t work like that. I repeat: Unless you have substantial knowledge of the company and its business operations, stay away.

 
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Posted by on July 2, 2017 in Uncategorized

 
 
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