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Make money! Try weekly options
Equities have always attracted a huge amount of interest, and with
other asset classes losing their glitter, stocks are fast becoming
the first choice for investments.
But the market is known for volatility and players wanting to
hedge their bets or use their funds to leverage their bets can use
derivatives effectively.
In fact, small investors can use the weekly options offered by the
Bombay Stock Exchange to further their gains. Here we try and
demystify the weekly options for you.
What are weekly options and how are they different from monthly
options?
Weekly options are exchange-traded options based on a stock or
index with shorter maturity of one or two weeks. Initially in
India, the stock and index options were offered for near, middle
and far month contract series.
BSE has now introduced weekly options series (normally Monday to
Friday) in addition to the existing monthly options series.
Normally, an investor will have, on any Monday, a choice of either
a 1 week Option or 2 week Option. Weekly options differ mainly in
terms of maturity.
Monthly options have maturity of one, two or three months.
In case of weekly options, the maturity will be either a week or
two. Monthly options series expires on the last Thursday of every
month. In case of weekly options, series expires every Friday.
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An illustrative guide
|
Strikes(Rs) |
Call Options Type |
Time To Maturity |
|
5 days |
12 days |
25 days |
|
450 |
In The Money |
27.26 |
31.45 |
37.84 |
|
475 |
At The Money |
10.18 |
15.96 |
23.36 |
|
500 |
Out of the Money |
2.31 |
6.67 |
13.28 |
|
Strikes(Rs) |
Call Options Type |
Time To Maturity |
|
5 days |
12 days |
25 days |
|
500 |
In The Money |
27.00 |
30.86 |
36.47 |
|
475 |
At The Money |
9.81 |
15.07 |
21.51 |
|
450 |
Out of the Money |
1.87 |
5.53 |
10.93 |
A small investor can use weekly options as against monthly
options as the cash outflow in weekly options is less as
compared to monthly options due to shorter maturity.
The table is a hypothetical example of a stock with a spot
price Rs 475 and annual volatility of 45 per cent which
shows us the difference between the premium amount required
to be paid for a 1 week , 2 weeks and monthly Options,
respectively.
Thus the above data show that the premium amount required to
be paid for weekly options is much lesser as compared to
monthly options and hence a small investor can use weekly
options and enjoy the similar profit potential as that of
monthly options by locking just a small amount. |
How can a small investor benefit from weekly options?
Weekly options will benefit the small investor in the following
ways: Weekly options will command lower premium owing to shorter
maturity and hence will be cheaper than monthly options.
Thus, a small investor would have to pay a lesser amount as
premium to take a position in weekly options compared with monthly
options, and can enjoy similar profit potential as that of monthly
options by locking just a nominal amount.
For a similar capital outlay as monthly options, small investors
can take larger positions in weekly options and investors would
also be able to take a short-term view in the underlying stock.
How does one start trading in weekly options? Does one need an
underlying stock to do this?
An investor interested in trading in weekly options will have to
get registered with a broker having membership of the BSE
derivatives segment as weekly options are available only on the
BSE at present. All derivative contracts are cash settled in
India.
As weekly option is a derivative instrument one need not own the
underlying stock to trade in weekly Options as it will be settled
in cash on exercising it or on its expiry.
Nikhil Lohade in Mumbai |
