Comment on Basics on Options Shorting/Writing

Nithin Kamath commented on 29 Jul 2014, 11:47 AM

The idea of shorting the OTM call is to basically be able to hedge your long call position. The problem with shorting a deep OTM option is that you are hedged only to the extent of Rs 2.7, whereas shorting 7850, you are hedged until 11.95. What this means is that if market goes against you, (starts going down), the 55.2 you have paid, you will loose only around 43 in case you have shorted 7850 call, but you will loose Rs 53 in case you have shorted 7950 call.

Which strike you want to choose will depend on your strategy, if the idea is to hedge, there is no point shorting 7950 call to reduce your risk by just Rs 2.

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