The Game of Options

Today, we will discuss how profitable and risky the game of options can be. As you might be aware, options are inherently a high risk/profit instrument. In addition, their inherent loss of value thru time decay makes us use options very rarely. Before we go into when Options need to be used, let's take a look at yesterday's trade.

For instance, yesterday we bought the 4400 July PE at 85 when the Nifty was trading at 4400. Though the Nifty did close later in the day at 4387, ie, 13 points down, the put actually closed at 75, ie, it had lost some value because of time decay.

The lesson that we can learn from this is that - Options should be bought near to the close of the day and need to be sold in the early hours of trading. Also options should be used when a large swing is to be seen. We used options(call) in early April because we saw that a huge swing was in the offing and had fabolous gains. Similarly we use them now because we feel that the trend is changing to the negative and we see a good swing in the downward direction.

If, for instance, we had traded options in the month of May, the profits would be very less, even if we got the index movement correctly, because the time decay would have eaten away what little movement was made by the indices.

That being said we will put an order at 49 for 4400PE today and we will see if it will be executed. This will be the last of the options that we will buy.