I am new to options and am trying to educate myself in the topic. I was wondering if in options writing the premium is what I receive and that’s my maximum profit, why don’t I sell/write out of the money call options and pocket the premiums. This sounds like free lunch to me and is too good to be true. So I came up with a few conclusions of my own.
The obvious the collateral margin is very high
No liquidity
Profit earned is 0.3-0.5% for the capital employed might not sound lucrative to many.
Some kind of black (scholes) magic I don’t understand.
Example : On 05/12/2022 Nifty closed at 18701 at the time the option premiums for OTM December 8th expiry call option 18900 strike was at the time 36₹. If I had sold/wrote 1 lot of 18900 and I would pocket a premium of 36*50 = 1800. Capital employed would be 90k - 1.2 L. The probability of making money on this trade is super high as the chances of nifty touching 18900 is low. I know its not impossible I am not arguing I also am aware that I can make a unlimited loss if nifty goes haywire. But on paper this trade sounds too good to be true. 1800₹ according to me is a not a bad profit earned in 3 days. If it was this simple why is not everyone making money. According to my example I would have surely made a profit as nifty is at 18560 and the premiums have fallen to 3₹. Also this strike has an OI of 1,50,369.
@members please help me understand, is this one of a kind situation or is there some kind of a catch I am missing?
Thank you,
In general Nifty can easily move 2% in 3days.
200 point otm is not too much OTM. It does not look like free lunch.
Few strikes further otm might seem like free lunch but it can knock teeth off too. Adjustments will b required. Also close to expiry moves can be brutal.
General psychology of beginners/normal trades is to double the money in short span where they tend to buy options for which the profitability is unlimited whereas shorting gives you limited profit in case of market trend follows against you losses are unlimited.
Further capital required while shorting is very high (around 1 lakh approx for 1 lot of nifty )whereas going long capital required is low.
Hence tendency to bet on unlimited profit or high profit is comparatively high.
Because it is next to impossible to get this order executed. Have you tried placing this order in real time? Why do you think the person at the other end of the trade will buy a 18900 call two days before expiry?
The thing with deep OTMs is that they keep giving you pennies regularly but one fine day something happens, and they take away all those months of pennies earned.
I agree with you, but wanted to know if people use this strategy before expiry to during a low volatile situation? I am no way entering a naked option ever, I have learnt my lessons. But just curious.
Thank you,
I understand what you trying to say. If I was looking for a quick buck I would have bought call or puts accordingly. Please don’t get me wrong, I am neither trying to make quick money nor trying to double to my capital. I am theoretically trying to understand and make sense, on paper my idea sounds very feasible. But what works on paper really does not work in real life (for most parts). Hence wanted to know what’s the catch 22 from the forum before I learn my lessons the hard way.
I am completely against naked options tried them multiple times never trying them again. All the trials was experimental turned out be a costly experiment.
So this is a possibility, this strategy can be employed as stated by me theoretically? Yes I have been in that situation consistent small profits wiped out over night
I did check the market depth for 18900 CE December 8th expiry, there were are lot of bid (buy) orders, spread was a little high but still I am sure I would have got my orders executed. Again I am not trying to fight you to it to prove my point that the orders would have got executed. I but did like your reasoning why would anyone want to buy a OTM call options 2 days before expiry. This makes sense to me but I could have got my orders executed
Yes, of course. The strategy can be taken live but I don’t think it’s a free lunch. You’re taking on a risk and are being compensated for it in the form of option premium.
18900ce was priced rightly at whatever price it was. If it wasn’t there at that price then there will be a possibility of arbitrage gain. Algos are so quick to sight this and the pricing happens.
If you see even 19500call will be at 3 to 4 points even when we are almost 1k points away. It is trading at those prices because of various reasons. For all of this you need you understand option pricing.
Let’s say 18900ce was at 10 points instead of whatever you stated.
Then I would simply buy 18700call one lot. Sell 18800call two lots. And buy 18900call one lot.
Am sure I would have made riskless profit irrespective of nifty expiry.
I apologies, I cannot do the mental math on this. If you could please run me through the numbers with an example or point in the direction as to where I can learn more about it. I am sure I am asking way too much here and I understand if you dont have time for it. But Thank you for you reply’s!!!
I have learnt my lessons. But just curious.
