Allora Dey

What Is Investment?

A solid foundation can withstand all the whims of an economic environment. This is an undeniable fact. The first chapter offers insight into the idea of investing itself. This offers everyone a foundation of fundamental knowledge. Once that is finished, we have focused more on the practical than the theoretical aspect in the following chapters. Money multiplication is a difficult task. It’s an art form. This art requires time and a lot of effort to master. We give you the necessary instructions in the most straightforward manner possible to make learning easy for you.

Make your money work for you! Best Wishes and Happy Learning!

How does one achieve their dreams? Money is the solution. The real obstacle, however, is how to generate income. Making ends meet is a concern for everyone in today’s world. There are many such uncertainties, including rising costs, shifting lifestyles, pink slips, health issues, etc. We must balance our income and expenses in order to maintain our social standing. Aside from that, the future looks bleak, so one should also make plans for rainy days. Saving alone is not a solution. Savings should be able to grow on their own through self-sustaining growth. Investment is what that is. You need to make financial plans in order to make your money work for you and then ‘relax’ the rest of your life.

There are many options open to us to invest our hard earned money. However, there is always the possibility of making a wrong choice which may lead to reduction of our investments. In today’s world, where it is easy to acquire simple and practical knowledge, there is no excuse if we do not learn about the various investment options and their ability to meet our needs. We all know that there are no guarantees in this world and there is always a factor called risk which may upset our plans. Just as sudden rain may upset our plans to go for a walk, risk can reduce the returns  we are expecting from our investment. We, therefore, need to acquire sufficient knowledge to be more informed investors. As a result, we must gain the necessary knowledge to become better investors.

Nature Of Investments

How do I invest?

The best course of action for you is to choose a strategy after getting your finances in order.

Where should I invest?

In mutual funds, stocks, bonds, and certificates of deposit (CDs). We’ll give you the lowdown on all of them while concentrating primarily on stocks.

When is the right time to invest?

There is no time like the present. Every time is equally good. But you will need to make a wise choice.

In this program, we will put an emphasis on making investments with the extra cash we have left over after taking care of our immediate needs. At this point, it is appropriate to mention a few fundamental concepts in investing, such as:-

• Time value of money (see the reference).
• Return (we shall discuss it later).
• Risk (covered separately).
• Ability to cash the investment etc.

Why Investment?

You Can Beat Inflation

Consider a scenario in which the interest rate on a fixed deposit is 10% and you are aware that the inflation rate has reached 12%. The rupee loses value at year’s end because the interest rate is lower than the inflation rate. Therefore, you suffer a loss.

Achieve Financial Goals

This might involve paying for a dream home, car, or level of education.

Plan your Retirement

Yes, you should start thinking about retirement also. Why not?

Numerous people receive recurring income in the form of monthly salaries or variable income in the form of fees, such as professional consulting fees for doctors. After subtracting monthly expenses, any remaining savings must be invested. The investment requirements could vary depending on the need: such as housing and education, are top priorities. long-term demands, such as retirement savings. Low priority requirements like a summer vacation or international travel.

• Urgent needs, such as housing and education.
• Long-term needs, such as saving for retirement.
• Low-priority requirements like a summer vacation or a trip abroad.

A range of time frames, including the next 12 to 36 months, longer terms, or even 10 to 12 years or more, are possible.

Risk & Return

Risk & return relationship is important in Investments

Just as we learn new words when we learn a new language, we need to learn the fundamental terms used when we set out to learn about any subject. They will become a part of our daily lives once we learn and comprehend them. These words must be commonplace in your daily life for you to be familiar with them. Still, let’s begin!

The terms include:

• Principal amount or amount initially invested.
• Date of investment.
• Period of investment.
• Date of encashment of investment.
• Return of investment or interest

Let’s use Mr Swapnil as an example. He is a medical representative and makes Rs30,000 per month. He can save Rs10,000 per month and needs about Rs20,000 for his monthly expenses. He desires for his son to become a doctor. In order to have enough money to support their son’s medical studies, he asks his wife to invest the money in the appropriate strategy. Mrs Swapnil is aware that obtaining a medical degree will set her back Rs5 lakhs after five years. In order to help cover the cost of Rs5 lakhs, she decides to invest Rs5,000 each month in a five-year scheme (we will explain this later).

• A sum of Rs5,000 is invested over 60 months (five years), or Rs3 lakhs.
• At the end of five years, they will require R 5 lakhs or more.
• If this occurs, their investment will have produced the desired return for them.

You can quickly determine the total amount with a 10% return using the calculator. If that doesn’t happen, she needs to choose alternative investment plans.

RISK
We take a certain amount of risk in every activity we engage in. When you toss a coin, for instance, you can’t predict with certainty whether it will land on its head or tail. There are two potential results, and the risk is 50%.

There are three possible results in a football game: victory, defeat, or a draw. The level of risk varies in business as well, in a similar manner. Although there is a significant amount of risk involved in investments, it can be reduced with the right information and analysis.

Consider, for example,

That MrsSwapnil purchased a share for Rs 200 of an oil company based on the fact that the same share was quoting only Rs150 a year back, thus giving an approx. annual return of 33 per cent (200-150/150). Her plans were based on the recommendations of Mr Moneybhai who said that the company is doing well. In case of an unexpected event such as an increase in oil prices the company’s performance will be affected and the share price may fall to Rs150, thereby resulting in a loss of 25 per cent.

Risks come in a variety of forms. Investors won’t ever be able to fully quantify them. All investments come with a risk warning because of this. Risks need not deter investors; instead, they should make them cautious and aid in their careful selection of the various investment options and planning of their strategies, as we will discover in the course’s later lessons. Each option may have low, medium, or high risk, as well as low, medium, or high expected returns. A wise investment choice will consider these risks and work to strike a balance between the investment’s risk and the anticipated returns. In essence, this is what is meant by risk management.

A course like this is designed to assist students like you in making informed decisions. This does not imply that there is no risk. It implies that the risk will be recognized and, with careful planning, it may be reduced. ‘No risk, no gain’ is the golden rule for all market investments. Without being willing to take the risk, there is nothing to be gained.

What is the difference between Investment and speculation?

The following table lists the key distinctions between investment and speculation:-

Some uneducated individuals equate stock market investments with gambling. It’s completely untrue. Gambling or betting primarily involves making an educated guess about the likelihood of an event. You might want to wager on the outcome of a cricket match, for instance. The odds are 50/50 if there are only two teams. Since a coin only has two sides, the odds of either side being the head or the tail are 50/50. Therefore, there is a 50% chance that it will be either head or tail. This implies that if the coin is tossed a very large number of times—let’s say 10, then 5 times it will land on its head and an equal number of times it will land on its tail. However, it is impossible to predict the result of an eight-time coin toss if someone makes a guess as to whether the outcome will be heads or tails. Gambling will have played a part in this situation’s outcome, especially if there is a potential payout.

Investments	Gambling
1. Constructed with a longer time horizon 2. Tries to balance the risk taken and the anticipated return. 3. Can lead to constant or consistent returns 4. Typically a scheduled activity	1. Instantaneously created 2. Is risky, and balancing risk and return is impossible. 3. Unexpected or impulsive behavior 4. Is adapted to the needs of each individual

Methods Of Investing

Direct and Indirect investing

As was briefly mentioned at the beginning of this chapter, an individual has a variety of options or avenues for investing. The decision should be based on information, professional counsel, the opportunity to invest, and a number of other factors. This course’s goal is to aid participants in reaching well-informed decisions.

We can distinguish between two categories of investments on a broad scale: direct investment and indirect investment.

A direct investment is one in which the investor directly decides to make the investment and fully bears the risk of the investment’s outcome, which could be profitable or result in a loss.

In the case of indirect investment, the investor seeks the assistance of a bank advisor or utilizes tools like a mutual fund to benefit from the financial institution’s or bank’s investment expertise and make a smart investment. The investor is the one who benefits from the gains or losses in this scenario as well. Investment advisory providers accept their respective professional fees in exchange for their services and disclaim any liability for any gains or losses resulting from the investments.

Investment Alternatives

What are the Investment Alternatives available for an Investor?

There are several investment option:

Real Assets:

are assets that, due to their utility, have intrinsic value. They include things like land, gold, machinery, and patents. They stand in stark contrast to financial assets. Real assets may be material or immaterial.

Tangible Assets:

As they lead to the creation of tangible assets, investments made to acquire assets like a car, television, washing machine, or any other household items that are physical and have a long lifespan are regarded as tangible investments. Depending on the justifications for purchasing them, acquiring these assets may be seen as an expense or an investment. For instance, purchasing a car for personal use is regarded as an expense. If a car is purchased with the intention of operating a taxi service to generate income, the purchase would be regarded as an investment because it has the potential to produce periodic income.

Intangible Assets:

An investment in an intangible asset could be thought of as the acquisition of knowledge, such as the course you have paid for with the goal of becoming a wise investor. Knowledge about investments is the asset you are acquiring, and it is an intangible asset.

A person may decide to buy a piece of property with either a short- or long-term horizon in mind. This choice is made in light of the person’s current needs. Investments in tangible assets include, for instance:

Real Estate:

It might be a commercial or residential apartment. It might be the acquisition of undeveloped land for the construction of single homes, bungalows, or commercial or residential structures.

Bullion: Precious metals, such as gold, silver, and others, can be invested in.

Precious Stones:

Investments in precious stones, such as diamonds and gems, are also likely to produce profitable results.

Business:

Intangible assets like patents, royalties, etc. or fixed assets like land, buildings, machinery, etc.

Others:

include paintings, antiques, etc.

Individual investors are typically drawn to physical assets and purchase them to satisfy their financial needs, which may be long-term or short-term. Financial instrument classification examples are shown in the section that follows. A contractual right to receive or deliver money or another financial instrument, as well as cash, are all examples of financial instruments.

Financial Instruments:

Are money, proof of ownership in a company, a legal right to receive or deliver money, or another type of financial instrument.

Financial Assets Vs Real Assets

WANT TO KNOW THE DIFFRENCE BETWEEN FINANCIAL ASSETS & REAL ASSETS?

It is crucial to emphasize now that there are distinctions between financial assets and physical assets. For instance, investing in company shares (a financial asset) is different from buying a real asset like a residential apartment, which can cost several lakhs of rupees. This comparison does provide a measure of the return each asset class provides. Sometimes, to illustrate the risk-return characteristics of each class of investment, comparisons between investments in gold, shares, and mutual funds are made.

Financial Assets	Real Assets
• Available through active markets like stock exchanges	• Available in traditional markets
• Offer high liquidity	• Offer low to moderate liquidity
• Easy to possess	• Difficult process to possess
• Does not require physical holding	• Requires physical holding
• Divisible to smallest unit, as for example, one share	• Unit of division is large, as for example, one flat or one bungalow

Depending on your needs, goals, time frame, and level of risk tolerance as an investor, you will decide whether to buy financial or physical assets. In some cases, acquiring a real asset may require you to pursue financial assets. For instance, if you want to buy a house in three years, you can put your money into financial assets first and then buy the real estate.

But the choice could be based on:

• Availability of funds.
• Need for liquidity (ability to sell the asset and generate cash).
• Time period of investment.
• Required rate of return
• Tax benefits

Matrix Of Investments And Their Relative Comparison

Features/Investment	Return	Risk	TDS	Tax Benefit	Market ability	Liquidity
Real Estate	High	Low	No	No	Low	Low
Bullion	Medium	Low	No	No	High	High
Antiques	Medium	Low	No	No	Low	Low
Bank Deposits	Low	Low	Yes	No*	No	High
P O Deposits	Low	No	Yes	Yes	No	Medium**
Government Bonds***	Low	No	Yes	Yes	Medium	Medium
Mutual funds – Debt	Low	Low	No	No	High	High
Mutual funds – Equity	High	High	No	Yes	High	High
Mutual funds Money Market	Very Low	Low	No	No	High	High
Equity Shares	High	High	No	No*	High	High

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Initial Public Offering (IPO) is the term used to describe the process by which private businesses sell shares to the general public in order to raise equity funding from retail investors. A privately held company becomes a public company through the IPO process. This process also offers savvy investors the chance to generate a sizable return on their investment.

If you are a knowledgeable investor, investing in IPOs may be a wise decision. However, not every new IPO is a fantastic chance. Benefits and risks are mutually exclusive. It’s crucial to comprehend the fundamentals before jumping on the bandwagon.

Since there is typically a share premium for current private investors, the transition from a private to a public company can be a crucial time for private investors to fully realize gains from their investment. Additionally, it enables public investors to take part in the offering.

KEY TAKEAWAYS

• Since there is typically a share premium for current private investors, the transition from a private to a public company can be a crucial time for private investors to fully realize gains from their investment. Additionally, it enables public investors to take part in the offering.
• To hold an IPO, businesses must satisfy Securities and Exchange Commission (SEC) and exchange requirements.
• IPOs provide companies with an opportunity to obtain capital by offering shares through the primary market.
• To hold an IPO, businesses must satisfy Securities and Exchange Commission (SEC) and exchange requirements.
• The company’s founders and early investors can use an IPO as an exit strategy to realize the full return on their private investment.

How an Initial Public Offering (IPO) Works

An organization is regarded as private before an IPO. The company has expanded with a relatively small number of shareholders as a pre-IPO private company, including early investors like the founders, family, and friends as well as qualified investors like venture capitalists or angel investors.

A company taking part in an IPO is taking a big step because it opens up the possibility of significant capital raising. This increases the company’s capacity for development and growth. Additionally, the increased transparency and credibility of the share listing may help it get better terms when looking for borrowed money.

A company will start to publicize its interest in going public when it reaches a point in its growth process where it believes it is mature enough for the demands of SEC regulations as well as the advantages and obligations to public shareholders.

This stage of development typically starts when a business achieves unicorn status, or a private valuation of about $1 billion. However, depending on the market competition and their capacity to meet listing requirements, private companies at various valuations with sound fundamentals and demonstrated profitability potential may also be eligible for an IPO.

A company’s IPO shares are valued using underwriting due diligence. When a company goes public, the privately held shares are converted to publicly held shares, and the shares of the existing private shareholders are now worth the public trading price. Special terms for private to public share ownership may also be included in the share underwriting.

Overall, the factors that create the company’s new shareholders’ equity value are the number of shares the company sells and the price at which shares sell. When a company is both private and public, shareholders’ equity still refers to the shares that investors own, but when a company goes public, the cash from the primary issuance significantly raises shareholders’ equity.

Types of IPO in stock market

There are two common types of IPO. They are:

1) Fixed Price Offering

2) Book Building Offering

1) Fixed Price Offering:- The issue price that some businesses set for the initial sale of their shares is known as a fixed price initial public offering (IPO). The price of the stocks that the company decides to make publicly available is disclosed to the investors.

Once the issue is resolved, the market’s demand for the stocks can be determined. If investors participate in this IPO, they must make sure they apply for the shares at the full price.

2) Book Building Offering:-

In the case of book building, the company launching the IPO offers the investors a 20% price band on the stocks. Before the final price is decided, interested investors place bids on the shares. Here, the investors must state the number of shares they plan to purchase as well as the price per share they are willing to pay.

The floor price of a share is its price at which it trades, and the cap price is its price at which it trades. Investor bids ultimately determine the price at which shares will be sold.

Steps to an IPO

• Proposals:-The best type of security to issue, the offering price, the number of shares, and the anticipated time frame for the market offering are all discussed in the proposals and valuations that the underwriters present.

• Underwriter:- Through an underwriting agreement, the company selects its underwriters and formally accepts to underwrite terms.

• Team:- Teams for IPOs are put together with underwriters, attorneys, CPAs, and Securities and Exchange Commission (SEC) specialists.

• Documentation:-
• The company’s information is gathered for the necessary IPO paperwork. The main IPO filing document is the S-1 Registration Statement. The prospectus and the privately held filing information make up its two components.
• The S-1 contains preliminary details regarding the anticipated filing date.

• It will go through numerous revisions during the pre-IPO process. The prospectus that is included is also updated frequently

• Marketing & Updates:- For the pre-marketing of the new stock issuance, marketing materials are created. To determine a final offering price and gauge demand, executives and underwriters market the share issuance. In the course of the marketing process, underwriters are permitted to modify their financial analysis. This may entail altering the IPO price or the issuance date as necessary. Companies take the necessary actions to satisfy particular requirements for public share offerings. Both SEC requirements for public companies and exchange listing requirements must be followed by businesses.

• Board & Processes:- Create a board of directors and make sure that procedures are in place for reporting quarterly auditable financial and accounting data.

• Shares Issued:- On the IPO date, the company issues its shares. The balance sheet’s stockholders’ equity is represented on the statement of cash received from the primary issuance of capital to shareholders. The value of each share on the balance sheet is then entirely based on the stockholders’ equity per share valuation of the company.

• Post IPO:- There might be some post-IPO provisions put in place. Following the date of the initial public offering (IPO), underwriters might have a set period of time in which to purchase additional shares. During this time, certain investors might experience quiet periods.

Advantages and Disadvantages of an IPO

Advantages

One of the main benefits is that the company can raise money by accepting investments from the entire investing public. This makes acquisition deals (share conversions) simpler to complete and improves the company’s visibility, reputation, and public image, all of which can boost sales and profits.

A company can typically benefit from more favorable credit borrowing terms than a private company thanks to the increased transparency that comes with required quarterly reporting.

Disadvantages

Companies may encounter a number of drawbacks to going public and may decide to adopt alternative tactics. One of the biggest drawbacks is the high cost of initial public offerings (IPOs), as well as the ongoing and frequently unrelated costs of maintaining a public company.

For management, which may be compensated and evaluated based on stock performance rather than actual financial results, fluctuations in a company’s share price can be a distraction. The business must additionally disclose financial, accounting, tax, and other business data. It might be forced to publicly divulge trade secrets and business strategies during these disclosures, which could give rivals an advantage.

It may be more challenging to keep good managers who are willing to take risks if the board of directors has rigid leadership and governance. There is always the option to keep things private. Companies may also request bids for a buyout rather than going public. In addition, businesses might look into some alternatives.

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Christmas Tree Spread. The option strategy entails purchasing one call at strike price A, skipping strike price B, selling three calls at strike price C, and finally purchasing two calls at strike price D. It is somewhat akin to a butterfly spread in that a pin at the short middle strikes is the desired result, but there is more room to run on the upside, making it a more bullish option strategy.

Due to the long lower legged strike price being further away from the short middle strikes than the standard butterfly spread, costs are also higher. The stock must rise in price in order for the position to turn a profit because it was opened at a higher cost. Losses are capped at the opening price in the event that the stock moves against the trader, even though the likelihood of a loss is higher.

Profit/Loss

The difference between the lowest strike price and the three short middle call strike prices is subtracted from the cost of the trade to determine the maximum profit. For instance, the maximum profit would be Rs7.50 if the distance between points A and C was Rs10 and the trade cost Rs2.50.

In the same example, the maximum loss would be Rs2.50 because it would equal the cost of the trade.

Breakeven

There are two points where things break even. By taking the bottom strike price (point A) and adding the trade’s cost, one can determine the lower breakeven point. Therefore, the lower breakeven would be Rs92.50 if point A was a 90-strike price option and the trade cost Rs2.50.

The highest strike price (point D) would be used to determine the upper breakeven point, from which one-half of the net debit would be subtracted. Therefore, if the trade’s cost was Rs2.50 and the point D strike price was equal to Rs105, our upper breakeven would be 103.75 (105-2.50/2).

Example

A trader could execute a 90/100/105 Christmas tree spread by purchasing one call with a strike price of 90, selling three calls with a strike price of 100, and purchasing two calls with a strike price of 105 for the following prices:

• Buy 1 XYZ 90-strike price call for Rs8.00
• Sell 3 XYZ 100-strike price calls for Rs6.90 (Rs2.30 each)
• Buy 2 XYZ 105-strike price calls for Rs1.40 (Rs.70 each)
• Total cost = Rs2.50

The investor will have lost the full Rs2.50 if the stock declines over the following three months, and all positions will be eliminated from his account.

The trader will profit Rs10 from the stock movement, taking advantage of the 90-strike price option, while the other options expire worthless if the stock trades up to Rs100 at expiration. Their net profit would be Rs7.50 because they spent Rs2.50 to make the trade.

The investor would have made Rs20 on the Rs90 call if the stock had reached a price of Rs110. Spend Rs30 in losses on the short middle 100-calls, or Rs10 X 3. Gain Rs5 twice for a total of Rs10 on the long upper 105-calls.

The investor would have paid Rs2.50 for the trade, so their net loss would only be Rs2.50. The final result would be Rs20 – Rs30 + Rs10, meaning all profits are a wash.

Conclusion

The more bullish a Christmas Tree spread becomes, while also lowering the cost of the trade, the higher the trader sets the strike prices. However, the likelihood of success decreases as strike prices are raised.

The implied volatility is sensitive to changes in this kind of spread. Inversely correlated with changes in implied volatility is the spread’s net price, which decreases when implied volatility increases and rises when implied volatility decreases. The trader who places this order hopes implied volatility will decrease.

Only seasoned traders should use a Christmas tree spread options strategy; it is not a strategy for beginners.

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Buy one long-term put at a higher strike price and sell one shorter-term put at a lower strike price to create a diagonal spread. The position resembles a long calendar spread with puts in some ways. We want to sell puts with an upside potential, but we also want to protect ourselves in case the stock experience a sharp decline.

The trader can keep selling downside puts in opposition to their long further out put if the execution is correct. As a result, after one short-term put expires, the trader can sell another short-term put that is scheduled to expire the following month, and so on until the long put’s expiration month.

Profit/Loss

The total premiums received from selling short-term downside puts are added together, less the initial premium paid to execute the trade, plus the strike price less the stock price on the last day of the month, to determine the maximum profit.

When the stock rises above the long-term put strike price, the diagonal put spread’s maximum loss is constrained to the cost of the trade.

Breakeven

It is impossible to determine a breakeven point for this dynamic trade because there are so many different scenarios and potential future trades.

Example

A trader could buy the June 100 put for Rs4 and then sell the April 95 put for Rs1.25, resulting in an initial cost of Rs2.75, if XYZ is trading at Rs100 and it is anticipated that it will trade lower over the next four months.

The April put is removed from the account if the stock trades lower than Rs97 by April expiration, and the trader has earned a profit on the long put.

Then, for Rs1.75, they could sell a May 95 strike put. By May expiration, if the stock is trading up to Rs95, the trader will bank Rs1.75 and also have Rs5 of intrinsic value in the long put. Then, for Rs1.25, they could sell a June 90 put. By June expiration, if the stock is trading at Rs92, the June put will also be worthless. In this case, the trader would have opened the trade by paying a premium of Rs2.75 and pocketing premiums of Rs1.75 and Rs1.25 along the way. Additionally, the stock would have an intrinsic value of Rs8. The total profit would be (Rs8+Rs1.75+Rs1.25-Rs2.75), or Rs8.25.

However, if the stock increased to Rs110 after the initial trade, it would be impossible to continue with the strategy because the value of both options would have decreased too much. Both options would expire worthless and the trader would lose his Rs2.75 if the stock never traded lower.

Conclusion

This is a more sophisticated strategy that aims to profit from higher short-term volatility. The stock should decline over time, but slowly, for the best results. That can be challenging, of course, if the strategy’s primary goal is to capture volatility.

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Buy one long-term call at a lower strike price and sell one shorter-term call at a higher strike price to create a diagonal spread with calls. The trade resembles a hybrid of a covered call and a long calendar spread with calls. The concept is that a trader wants to sell upside calls while also ensuring their safety in the event that the stock rises.

The trader can keep selling upside calls in opposition to their long further out call if the execution is successful. Therefore, after one short-term call expires, the trader can sell another short-term call that is scheduled to expire in the month after. This can be done up until the month in which the long call is scheduled to expire.

Profit/Loss

The total premiums received from selling short-term upside calls, less the initial premium paid to execute the trade, plus the stock price less the strike price on the final month, are added up to determine the maximum profit.

When the stock trades below the long-term call strike price, the diagonal call spread’s maximum loss is limited to the cost of the trade.

Breakeven

It is impossible to determine a breakeven point for this dynamic trade because there are so many different scenarios and potential future trades.

Example

A trader could buy the June 100 call for Rs4 and then sell the April 105 call for Rs1.25, resulting in an initial cost of Rs2.75, if XYZ is trading at Rs100 and it is anticipated to trade higher over the next four months.

A trader could buy the June 100 call for Rs4 and then sell the April 105 call for Rs1.25, resulting in an initial cost of Rs2.75, if XYZ is trading at Rs100 and it is anticipated to trade higher over the next four months.

The April call is removed from the account if the stock trades up to Rs103 by April expiration, and the trader has earned a profit on the long call. Then, for Rs1.75, they could sell a May 105 strike call. The trader keeps the Rs1.75 and gains Rs5 of intrinsic value in the long-term call if the stock trades up to Rs105 by May expiration. Then, for Rs1.25, they could sell a June 110 call. By June expiration, if the stock is trading at or above Rs108 the June call will also expire worthless. In this case, the trader would have opened the trade by paying a premium of Rs2.75 and pocketing premiums of Rs1.75 and Rs1.25 along the way.

Additionally, the stock would have an intrinsic value of Rs8. The total profit would be (Rs8+Rs1.75+Rs1.25-Rs2.75), or Rs8.25.

But if the stock dropped to Rs90 after the initial trade, both options would lose too much value, making it impossible to continue with the strategy. Both options would expire worthless and the trader would lose their Rs2.75 investment if the stock never rose in price.

Conclusion

This is a more sophisticated strategy that aims to profit from higher short-term volatility. The best scenario is for the stock to increase gradually over time. That can be challenging, of course, if the strategy’s primary goal is to capture volatility.

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Selling a short-term put and buying a long-term put with the same strike price make up a long calendar spread with puts, also referred to as a time spread. The idea is that the longer-term put retains the majority of its value while the shorter-term put loses value more quickly as expiration draws near and, ideally, is worth nothing or almost nothing at expiration. This lowers the cost of the trade by selling the shorter-term put.

At the shorter-term put’s expiration, the trader wants the stock to trade as low as the strike price, but not lower. When this option expires worthless, there will only be one remaining long put, which will allow for profits if the stock price keeps falling.

Profit/Loss

The profit potential for this position is limitless, at least until the stock price drops to zero, but not until the shorter-term put expires worthless.

The time value of this spread becomes worthless if the stock makes a significant move in either direction before the short-term put expires, and the trader will forfeit the premium they paid to enter the trade.

Breakeven

The stock must make a significant move either higher or lower before the short-term put expires for the long calendar spread with puts to reach either of its two breakeven points. It is impossible to pinpoint these points, however, because the time value of this trade depends on the volatility level.

Example

If the stock XYZ is currently trading at Rs105 and we decide to purchase a long calendar put spread with a strike price of Rs100 that entails selling a March call for Rs3 and buying a July call for Rs4.50, our subsequent cost would be Rs1.50 (Rs4.50-Rs3).

The March puts would expire worthless and be removed from our account if the stock traded at Rs101 at the time of expiration in March. Only the lengthy July puts remain at this time. We would make Rs10 on the puts if the stock fell to Rs90 by the July expiration, but since we paid Rs1.50 for the position, our profit would only be Rs8.50. Consider that our profit would have been only Rs5.50 if we had only purchased the July puts at the beginning (rather than selling the March).

The shorter-term puts would expire worthless if the stock reached Rs120 by March expiration, but the longer-term July puts would be so far out of the money that they would have almost no value left. The investor could either hope for a miracle or sell out of the positions for pennies. The longer-term puts would also expire worthless if the stock doesn’t reach Rs100, and the investor would lose his Rs1.50 investment.

Both sets of puts would be so far in the money by the time March expiration rolled around that they would effectively have the same value, made up entirely of intrinsic value. The Rs1.50 that was paid for the job would therefore be lost.

Conclusion

If you anticipate a stock to trade lower, but that move will occur in the future after the short-term puts have expired, you should execute a long calendar spread with puts.

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Many option traders, including hedge funds, money managers, and individual investors, favor the iron condor option strategy. By simultaneously selling a bear call spread and a bull put spread, the options strategy is carried out. Its name comes from the way the graph resembles a bird spreading its wings. With this strategy, four different strike prices are used, all of which have the same expiration month.

The inner strike prices, points B and C, are typically where this strategy is applied, with the distance between the puts and calls being roughly equal.

The appeal of this strategy is the larger net credit received for simultaneously selling an out-of-the-money call spread and an out-of-the-money put spread; however, because the maximum losses are capped, it is more conservative than a straddle or strangle.

Strategy

Investors who believe there won’t be much movement in the stock price before expiration would execute an iron condor, allowing them to earn a higher premium. Furthermore, even though two vertical spreads are being executed in this case, the margin needed to execute an iron condor is the same as that needed to execute a single vertical spread. The trader is assured of winning at least one side of the trade for this reason.

Due to its potential for balancing risk and reward, the iron condor is a preferred options trading strategy among many options traders. An iron condor trader anticipates that the underlying stock will trade within a constrained range, causing the option to expire between the two short strikes. Depending on the iron condor’s range and how it relates to the stock price, it can also be executed with a slight tendency either to the bullish or bearish.

To avoid any unexpected movement in the stock, which could turn a winning trade into a losing trade, it is almost always a good idea to close out the position a few days before expiration. Markets can change quickly and without warning, so keep in mind that even though higher implied volatility increases the net credit a trader can receive, it also makes a trade more risky and volatile. Because of this, it’s wise to always be aware of your risk exposure and how to adjust your trade should the market move against you.

Profit/Loss

Once the stock leaves the inner short strike prices and pierces either the upper call spread or lower put spread, the trader begins to lose money on this position. The difference between the call or put side, minus the premium paid, is used to determine the maximum loss. similar to a bull put or bear call spread.

If the stock expires between the two short strikes, denoted by points B and C on the graph above, the maximum win is determined.

Breakeven

There are two breakeven points on an iron condor.
Upper Breakeven = short call strike + credit received
Lower breakeven – short put strike – credit received

Example

A trader could sell a 105-110 call spread for Rs1.50 net credit and a 90-95 put spread for Rs1.50 if the stock XYZ is trading at Rs100. There, the trader would get a Rs3 premium all in all.

The trader would keep the entire Rs3 premium and all of the options would expire worthless if the stock fell to Rs96.

If the stock rose to Rs112, the trader would incur a net loss of Rs5 after incurring losses of Rs7 on the 105-strike price call and Rs2 on the 110-strike price call. However, since they only lost a maximum of Rs2 (Rs5-Rs3) when they sold this position for Rs3.

Conclusion

Investors who anticipate a neutral market favor the iron condor as an options strategy. A trader’s chances of success increase as they move further away from the money, but the premium they will receive decreases. When time decay picks up and there are 30 to 60 days left before the strategy expires, it is best to start using it. It enables investors to take on positions with low risk, high capital returns, and a high likelihood of success.

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Selling a call and a put with the same underlying security, strike price, and expiration date constitutes a short straddle. On the graph below, Point A stands in for this strike price. Credit is received and profits are made with a short straddle when the stock maintains a narrow range. A short straddle’s potential for profit is capped at the total premiums collected. When there is little movement in the stock until expiration, this strategy performs best.

If the stock pins at the strike price at expiration, the investor will receive his maximum gain, winning both the call side and the put side and keeping the entire premium from both positions. The investor will suffer if the stock does experience a significant move, though.

Profit/Loss

Maximum Gain = Net Premium Received

A short straddle strategy has an unlimited potential loss because the stock may continue to move against the trader in either direction.

Breakeven

The premium is added to our strike price to determine the breakeven on the straddle’s upside, and its subtraction from the strike price to determine the breakeven on the downside.

Top side breakeven: 100.00 + 3.50 = 103.50
Bottom side breakeven: 100.00 – 3.25 = 96.75

Example

If a trader places a short straddle order at these prices:

• Sell 1 XYZ 100 call at 3.10
• Sell 1 XYZ 100 put at 3.30
• Net credit = 6.40

The trader would keep the full Rs6.40 and make their maximum profit if the stock closed at Rs100.

If the stock rises to Rs110, the trader would lose Rs10 on the call with a Rs100 strike price, but since they made Rs6.40 on the straddle, they would only lose Rs3.60 overall.

Conclusion

This is a market-neutral strategy that functions best when there aren’t any important announcements or earnings coming up. The traders who carry out a short straddle want the stock to maintain a largely stable price over the course of the trade.

Straddles are frequently sold by traders in order to receive two premiums, which makes it necessary for the stock to move twice as far in either direction before they start to lose money. The straddle price is typically the distance from the current price that the market anticipates the stock to travel before expiration. This means that when making this kind of trade, traders must be shrewd and have good timing.

As the investor waits for both options to expire worthless, time decay works in their favor. As the position ages, the investor gains money quickly as long as the stock does not experience any abrupt movements.

It is advised to execute a trade like this with extreme caution and in small lots because it does carry an unlimited risk.

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A long straddle is created by purchasing a call option and a put option with the same underlying asset, strike price, and month of expiration. The tactic is employed in cases of extremely erratic market conditions where one anticipates a significant change in the price of a stock, either upward or downward. Such situations can occur when a business makes a significant announcement, reports earnings, or experiences other market-moving events.

As the investor only cares about how far the stock will move and not in which direction, it is a direction-neutral strategy. The trader can make money on the call option if the stock trades higher, but the put option loses value if the stock trades lower. The trader can make money on the put option and let the call expire worthless if the stock trades lower. The potential for profit is limitless, while the risk is only as great as the entry fee. The stock pinning at the strike price at expiration results in the maximum loss.

Profit/Loss

The potential profit from a long straddle strategy is limitless because the position can keep gaining as the stock moves further in either direction.

Maximum Loss = Net Premium Paid

Breakevens

There are two distinct breakeven points in a straddle.

Lower Breakeven = Strike Price of Put – Net Premium
Upper Breakeven = Strike Price of Call + Net Premium

The maximum loss for a trader is the cost of the straddle. Only when a stock pins at the straddles strike price does maximum loss occur.

Maximum Loss = Net Premium Paid

Example

If a stock is trading at Rs100 and one is expecting the stock to either increase or decrease in the near future. An investor can simultaneously purchase Rs100 call, and Rs100 put for the net cost premium of Rs6.

The Rs100 call would be worth Rs25 after deducting the Rs6 premium, making a profit of Rs19 if the stocks traded up to Rs125 at expiration. The Rs100 put option would instead have a value of Rs25, yielding the same Rs19 profit after deducting the premium paid, if the stock dropped in value to Rs75 at expiration.

Conclusion

Since the long straddle consists of two bought options, time decay is an enemy of the tactic. The longer the straddle is on, the more value it loses because the strategy depreciates every day due to time decay.

This tactic typically performs best in erratic markets and has an unlimited potential for profit. The investor will profit from an increase in volatility and need not worry about the direction of the price movement.

Because the premium paid for this strategy is typically high, the amount of the price changes must be significant in order to generate profits.

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The trader who executes this position is bullish and expects the stock to move higher but is taking a cautious approach.

A call backspread is a tactic that entails first selling calls with lower strike prices (point A), and then buying more calls with higher strike prices (point B). Typically, the option with the lower strike price is one that is executed in the money.

The trader who executes this position is bullish and expects the stock to move higher but is taking a cautious approach. The trader is starting out with the advantage because, if at all possible, they would like to execute a call backspread for a credit; even if the stock trades lower, they will still make a small profit.

Given that the stock needs time to rise to the higher level, the longer the expiration, the better the investor’s chances of winning. But more time does come at a price.

The investor will benefit more from close proximity between the strike prices, though at a higher cost. It is simpler to set up this trade for a credit when the strike prices are further apart, but there is a lower chance that the stock will rise to the higher strike price.

Profit/Loss

This trade has an unlimited potential for profit because as long as the stock trades higher after passing the upper strike, profits will keep increasing.

When the stock stalls at the higher long strike prices at expiration, this trade will lose the most money possible. This would imply that while the long calls would be out of the money and worthless, the short calls would finish in the money and have value.

Breakeven

There are two breakeven points for the call backspread, which can be calculated as follows:

Lower breakeven =Strike of the short call’s contract

Upper breakeven =plus the maximum loss plus the strike price of long calls

Example

A trader could enter this trade with no out-of-pocket expense if they used a backspread that involved selling a 50-strike price call for Rs3 and buying two 55-strike price calls for Rs1.50.

The trader will break even if the stock price remains below Rs50 at expiration because both options will expire worthless.

The lower strike price call would be Rs5 in the money if the stock reached Rs55, but the calls with a strike price of Rs55 would have lost money. The investor here loses the full Rs5.

The trader would lose Rs20 on the 50-strike price call and make Rs15 on each of the two 55-strike price calls (Rs30) if the stock traded to Rs70, for a total profit of Rs10 (Rs30-Rs20).

Conclusion

This is a wise course of action when there is a chance that a company will receive truly positive news that will raise its stock price. A lawsuit settlement or the launch of a new, highly regarded service are two examples.

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