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Old 16th September 2012, 07:45 PM
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Default In The Money Options



Why people say is it good to purchase in the money options, are they not more expensive?

As an eg: Nifty today is at 5570: Which of the following should be preferable for 27 Sep? {} gives offer price.

A) Buy Call 5500 {101.55} & Buy Put 5600 {64.15} (In the money)
B) Buy Put 5500 {26.2} & Buy Call 5600 {43.3}

To make money, you will need decent upside or downside in any case but the second option is going to be much cheaper.

To make profit in B option I need upside of 26 Rs in Call OR 43 Rs in Put option.
To make profit in A option I will need upside of 64 Rs in Call OR 101 Rs in Put.

B is more probable than A.
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Old 16th September 2012, 11:10 PM
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Originally Posted by ijay View Post
Why people say is it good to purchase in the money options, are they not more expensive?

As an eg: Nifty today is at 5570: Which of the following should be preferable for 27 Sep? {} gives offer price.

A) Buy Call 5500 {101.55} & Buy Put 5600 {64.15} (In the money)
B) Buy Put 5500 {26.2} & Buy Call 5600 {43.3}

To make money, you will need decent upside or downside in any case but the second option is going to be much cheaper.

To make profit in B option I need upside of 26 Rs in Call OR 43 Rs in Put option.
To make profit in A option I will need upside of 64 Rs in Call OR 101 Rs in Put.

B is more probable than A.
Don't go by absolute figures. Check %age figures and you will understand.

Time Value in (spot @ 5570)

A) Buy Call 5500 {31.55} & Buy Put 5600 {34.15} total cost : 65.70 + intrinsic value=100.
B) Buy Put 5500 {26.2} & Buy Call 5600 {43.3} total cost : 69.50

@ nifty=5700
A) +200 -165.70= 34.30/165.70 = 20.7%
B) +100 - 69.50= 30.5/69.5 = 43.88%

@nifty= 5500
A) +100 -165.70= -65.70/165.70 = -39.65%
B)0 - 69.50= -69.5/69.50 = -100%

So both chances of profit and loss are higher in B than in A. hence, we cannot say B is more profitable than A.

Last edited by Prudent_Investor : 16th September 2012 at 11:26 PM.
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