SPECULATION: BULLISH SECURITY BUY CALLS OR SELL PUTS
There are times when investors believe that security prices are going to rise. For instance, after a good budget, or good corporate results, or the onset of a stable government. How does one implement a trading strategy to benefit from an upward movement in the underlying security? Using options there are two ways one can do this:
BUY CALL OPTIONS (OR)
SELL PUT OPTIONS.
We have already seen the payoff of a call option. The downside to the buyer of the call option is limited to the option premium he pays for buying the option. His upside however is potentially unlimited. Suppose you have a hunch that the price of a particular security is going to rise in a months time. Your hunch proves correct and the price does indeed rise, it is this upside that you cash it on. However, if your hunch proves to be wrong and the security price plunges down, what you lose is only the option premium.
Having decided to buy a call, which one should you buy ?
The following table gives the premium for one month call and puts with different strikes.
| value of underlying | strike price of option | call premium in Rupees | put premium in Rupees |
| 1250 | 1200 | 80.10 | 18.15 |
| 1250 | 1225 | 63.65 | 26.50 |
| 1250 | 1250 | 49.45 | 37.00 |
| 1250 | 1275 | 37.50 | 49.80 |
| 1250 | 1300 | 27.50 | 64.80 |
Given that there are number of one month calls trading, each with a different, each with a different strike price, the obvious question is: which strike should you choose ? Let us take look at call options with different strike prices. Assume that the current price level is 1250, risk free rate is 12 % per year and volatility of the underlying security is 30 %.
The following options are available:
A one month call with a Strike of 1200
A one month call with a Strike of 1225.
A one month call with a Strike of 1250.
A one month call with a Strike of 1300.
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