A Beginner's way to trade options.

[sameer999]

I hav a query.

Suppose if i write an option contract, i will earn premium but if sombody exercises his option , what will happen to my option contract?

suppose i write nifty ce 4800 @ 85 and i will earn 85x50 Rs. premium if nifty expires below 4800 .

Is it that my work is over and i had to wait till expiry to see if nifty expires below 4800 , i will keep my premium earned >?

And if suppose there comes many ups and downs in nifty before expiry.

so , the person who had bought the ce 4800 @ 85 may like to square off his position by gaining profit of few points when nifty rises.

so , will that affect my option contract and will my contract be cleared before expiry? will i be at loss if som1 clears his position in profit or i simply hav to wait till expiry ?

 

[terminator_123]

I hav a query.

Suppose if i write an option contract, i will earn premium but if sombody exercises his option , what will happen to my option contract?

suppose i write nifty ce 4800 @ 85 and i will earn 85x50 Rs. premium if nifty expires below 4800 .

Is it that my work is over and i had to wait till expiry to see if nifty expires below 4800 , i will keep my premium earned >?

And if suppose there comes many ups and downs in nifty before expiry.

so , the person who had bought the ce 4800 @ 85 may like to square off his position by gaining profit of few points when nifty rises.

so , will that affect my option contract and will my contract be cleared before expiry? will i be at loss if som1 clears his position in profit or i simply hav to wait till expiry ?

European options can be exercised only at the expiry. All index options are European(hence ce, pe). So you can only squareoff before expiry.

 

[Smart_trade]

I hav a query.

Suppose if i write an option contract, i will earn premium but if sombody exercises his option , what will happen to my option contract?

suppose i write nifty ce 4800 @ 85 and i will earn 85x50 Rs. premium if nifty expires below 4800 .

Is it that my work is over and i had to wait till expiry to see if nifty expires below 4800 , i will keep my premium earned >?

And if suppose there comes many ups and downs in nifty before expiry.

so , the person who had bought the ce 4800 @ 85 may like to square off his position by gaining profit of few points when nifty rises.

so , will that affect my option contract and will my contract be cleared before expiry? will i be at loss if som1 clears his position in profit or i simply hav to wait till expiry ?

Once you write (sell) an option contract,you have to continuously monitor it to ensure that the risk on the same does not go out of control.Index contracts are European style contracts and they cannot be excercised before the expiry date.

The person who has bought call,can sell the call once market goes up and make profit by way of increased premium he gets if the market has gone up. For your sale position,it makes no difference to your position...it will be settled when you buy that over or on the expiry day...but in between market goes up and down.....increasing or reducing the risk on the contract sold by you....

Best Wishes,

Smart_trade

 

[sameer999]

Once you write (sell) an option contract,you have to continuously monitor it to ensure that the risk on the same does not go out of control.Index contracts are European style contracts and they cannot be excercised before the expiry date.

The person who has bought call,can sell the call once market goes up and make profit by way of increased premium he gets if the market has gone up. For your sale position,it makes no difference to your position...it will be settled when you buy that over or on the expiry day...but in between market goes up and down.....increasing or reducing the risk on the contract sold by you....

Best Wishes,

Smart_trade

Hi ST, so if i wrote an index option, it will be exercised only at expiry and i will be at profit of full premium which i earned by selling if the nifty spot is lower/upper than my call/put strike.

plz correct me if i am wrong.



Also, what if i hav wrote a stock option?(American type) in that case, the person who bought it may exercise it anytime before expiry if his position comes in profit .


So, i will be at loss n the option will be exercised n cleared off by the buyer , how will i know about that?

 

[lazytrader]

AW10 , meant to say that in case u are long on nifty and if nifty rises, then no additional margin would be charged other than placed initially when buying the call.

Also, in CE4000, when nifty spot rises to 4100, then profit is not 100 , it would be som 25-35 points of premium rise which depends on the volatility , time left to expiry etc.

So when nifty rises up, our position is in profit, M2M also is in profit.
no need to place additional margin as long as position is in profit.

correct me if i am wrong.

No idea how it is calculated for options. I was talking about futures. That is what I read just wanted to confirm with you guys.

 

[Bhuppi]

thank you very much for this explanation.

 

[AW10]

Hi ST, so if i wrote an index option, it will be exercised only at expiry and i will be at profit of full premium which i earned by selling if the nifty spot is lower/upper than my call/put strike.

plz correct me if i am wrong.



Also, what if i hav wrote a stock option?(American type) in that case, the person who bought it may exercise it anytime before expiry if his position comes in profit .


So, i will be at loss n the option will be exercised n cleared off by the buyer , how will i know about that?

Sameer, I am sharing my 2 cent on this.. ST - plz feel free to add your views as well..

Yes, Stock options can be excercised at any time before expiry. If option buyer uses his right and excercises the option, then exchange will randomly assign it to one of the open seller who
has open position on that day.. If you are lucky to get assigned..its great... (no need to afraid from assignment).. this just brings you profit quickly. Here are the reasons

1) If you sold the option, and it is going up in value, that means it has gone beyond breakeven point, then assignment helps you in cutting your loss.
2) If strike has not crossed breakeven and some fool buyer decides to excercise it.. then it is great for you.. cause u booked the profit (if not complete then atleast parial profit).
So you are free to find better trade now. You can very well go back and sell the same option at higher price now, if your view on stock has not changed.
i.e. milking it twice.
3) If stock option is execercised before the expiry, then the person excercising it looses the time value of the option and just gets the real value only. eg.
105 strike, might be going at 5 rs. when mkt is at 108. So if he excrecise it, he will get only 3.. i.e. ur liabilty is only 3. And if you decide to go back and squareoff this position in mkt
to cut your loss then u will be paying 5 rs for the same.. Thats great..isn't it.. someone is helping u more to reduce yr loss from 5 to 3.
You can very well sell same option to some other buyer tomorrow at higher price with higher breakeven point...

Luckily in our market the assignment is settled in cash.. so u don't have to shell out big money to take delivery of stocks. otherwise, u would get margin call for lack of fund to buy so many stocks.
Even in that case, u are getting stock at lower price i.e. the strike price and cause it is excercised today, that means the curremt mkt price is higher then the price at which u have got the stock.
So go the market sell your gifted stocks (i.e. don't meet the margin call and ask broker to sell the stocks and collect money from mkt)

You will know about this assignment from your broker
1) either thru margin call
2) checking your open positions and finding that one short position has disappeared
3) checking in excercise/assigment section of their site, if there is one.

So understand the impact of this assignment process.. and soon u will start loving it like I do. In my view, it is one the best thing that can happen to option writer.

Happy Trading

 

[sameer999]

............ 3) If stock option is execercised before the expiry, then the person excercising it looses the time value of the option and just gets the real value only. eg.
105 strike, might be going at 5 rs. when mkt is at 108. So if he excrecise it, he will get only 3.. i.e. ur liabilty is only 3. And if you decide to go back and squareoff this position in mkt
to cut your loss then u will be paying 5 rs for the same.. Thats great..isn't it.. someone is helping u more to reduce yr loss from 5 to 3.





Happy Trading

Hi AW10, thnx for your valuable information,

I want to say , 105 strike might be goin @ 5 whn market is at 108 but when i sold/wrote it , i also hav earned som premium , lets say premium be atleast 2.5 to 3.5, I assumed tht premium coz stock must hav moved significantly so that the premium value now has become to 5 , almost getting DOUBLE. i,e 100% rise in premium.

So, if i squared off my position by buyin back @ 5, my loss = 5-2.5 = 2.5

IF somone exercises it at 108 , my loss = 108-105-2.5 = 3-2.5 = .5

 

[tvrssvk]

Hi all Seniors,

Sorry for intrupting the flow...I would like to knw whether trading options is similar to intraday trading....whether we have to sit in front of the system continously till the end of the trading day or whether we can trade option like swing trading a stock. Kindly provide the info.....

 

[AW10]

Hi AW10, thnx for your valuable information,

I want to say , 105 strike might be goin @ 5 whn market is at 108 but when i sold/wrote it , i also hav earned som premium , lets say premium be atleast 2.5 to 3.5, I assumed tht premium coz stock must hav moved significantly so that the premium value now has become to 5 , almost getting DOUBLE. i,e 100% rise in premium.

So, if i squared off my position by buyin back @ 5, my loss = 5-2.5 = 2.5

IF somone exercises it at 108 , my loss = 108-105-2.5 = 3-2.5 = .5

You are right Sameer. So by excercising ITM stock option before expiry, the buyer is loosing the time value of that option.. and that part becomes additional money for option seller.

Personally I don't see why shd one excercise option and loose time value.. Only possibility might be LOW LIQUIDITY where one can't sell the option in open market.. cause buyers are quoting ridiculously low price.

Happy Trading