Posted by: sanjayshetty | June 23, 2005

Making money when the market goes up or down

StockOptions or Derivatives are an area which have certainly caughy my fancy. Infact to the extent that I hardly if ever trade in equities now.

Kiyosaki says one needs to know how to be able to make money when the stock market goes up or down.
Frankly for quite some time I didn’t understand how this was possible. As most people I was aware you can make money when the market goes up. But making money when it goes down sounded like outright crazy. Well soon enough I realized that I had a closed mind.
I soon learnt that there are numerous ways to do that. Two of which I’m aware of are Short Selling and Put options.

Well I recently tried an options strategy called straddle. Basically I bought a call and put for the same strike price and expiry date of a scrip “Cipla”.
Strike price: 290
Call price(premium):6.8 Rs/option
Put price(premium):7:00 Rs/option
Lot size: 1000
So effectively the call cost me Rs 6800 and the put cost me 7000. My total investment was Rs. 13800/-

Ok now why did I buy both a call and a put.

The market was crossing new highs… Cipla was trading close to 290 and pharma stocks were not doing too great. I felt the market could go in either direction pretty fast. Which way it would go that I was not sure off but I certainly didn’t want to loose out. In addition the cost of the call and the put were nearly the same amount. Since I was quite sure there would be a decent fluctuation in the market I used the straddle so that at the least my cost of investment would be recovered.
In normal cirumstances if I was sure that the trend was upwards only I would have bought a call option, or if alternatively I thought the trend was downward only I would have bought a put option.

Sure enough in about 3 days Cipla went below 290 and touched about 283 and my Put option sell price was about 9.05 which meant I was making approximately Rs. 2250(9050-6800) on it. But the general market was trending up. So I sold my Put option and made approximately 33% gain on it. Sure enough with the rest of the market Cipla started moving up. It reached approximately 305 and thats when I now sold my call option whose price was now Rs. 12.5 netting me 5500 (12500-7000) or a return of 78.5% on my investment of 7000.
Note1: I’ve not taken into account brokerage charges, nor I’m taking into consideration tax.
So totally on an investment of Rs. 13800 I made approximately 56% return on investment.
Note2: Post my selling the call option the Cipla scrip went up even further to almost Rs. 311. Now common logic might prompt one to say “hey you should have hung on to it you would have made a ton on money” But frankly I’m glad I got my money off the table. This way I have the money in my pocket and don’t count my money while it’s still in the market.

Resources:
Investopedia: Stock Options basics

I would love to hear of how anybody reading this might have used options or other interesting strategies.

Sanjay Shetty

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Responses

  1. Hi Sanjay ,gr8 post .I started trading on derivatives from few days ago bt I made lots of loss.Bt ur tips will be benificial for me.

    Thank u


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