Accounting & Settlement of Options.

[sangfroid22]

Hi all,

Till now, I've been trading in Stock market, Cash segment.

Now, I'd like to trade in F&O Segment.

Kindly, clarify the following queries.

1Q) Suppose I buy a Call option of ICICI Bank @ an Strike price of Rs.620/- (Lot size: 175) with an Expiry date 29/October/2008 and the premium payable is Rs.50 per share i.e., total premium payable is 50*175= 8750/-.

1.1Q) Now if on or before the expiry date, the ICICI Bank is trading @ Rs.700/- per share, can I exercise the call option to buy at the strike price.

1.2Q) If I exercise the call option, do I have to Cash settle (620*175= 108500/-) i.e., do i have to pay remaining balance amount of Rs.99750/-(contract value minus premium or 108500-8750= 99750) or is the premium paid sufficient for square off?

1.3Q) Is the premium paid refundable/ adjustable i.e., will my break-even price be Rs.670/- (strike price plus premium or 620+50=670/-) or Rs.620/-(Strike price).

1.4Q) If after few days, the premium rises to Rs.80/-, do I've to pay difference amount and will my break even price rise to Rs.650/-. And if the premium decreases to Rs.20/- will the difference amount be credited into my account and will the break even price then become Rs.630/-.

1.5Q) In F&O segment, is it sensible to buy at lower premium or high premium?

1.6Q) If I buy at a low premium, say Rs.10/- and the MTM price raises the premium to Rs.20/- will my loss be restriceted to the initial premium paid or End of day premium.

1.7Q) If I wish to sqaure off Call option, do I've to take delivery and then settle in Cash segment or Can I just enter in to opposite transaction i.e., put option.

1.8Q) I learnt that Option indices are European style i.e., can squared off only on expiration date. Now, my query is Can I square off Option indices (CE), simply by entering into opposite transaction before the Expiration date?

In the mean time clarify the afore-mentioned queries. If I get further doubts, I'll drop an enquiry.

Thanking you,

Sangfroid22.

 

[dp111]

the premium paid is never refundable or adjusted , in india options are cash settled. u have too many questions , please read basics about derivatives in india on nse , bse website.

 

[rkkarnani]

Hi all,

Till now, I've been trading in Stock market, Cash segment.

Now, I'd like to trade in F&O Segment.

Kindly, clarify the following queries.

1Q) Suppose I buy a Call option of ICICI Bank @ an Strike price of Rs.620/- (Lot size: 175) with an Expiry date 29/October/2008 and the premium payable is Rs.50 per share i.e., total premium payable is 50*175= 8750/-.

1.1Q) Now if on or before the expiry date, the ICICI Bank is trading @ Rs.700/- per share, can I exercise the call option to buy at the strike price.

When it trades at 700 the option premium shall increase, you can sell your call and get the difference as profit!!! In India we still have only settlement by cash in Options!!!

1.2Q) If I exercise the call option, do I have to Cash settle (620*175= 108500/-) i.e., do i have to pay remaining balance amount of Rs.99750/-(contract value minus premium or 108500-8750= 99750) or is the premium paid sufficient for square off?

As the Option is cash settled, you would need to exercise only when you are not getting the fair value for your Call in the market!!!


1.3Q) Is the premium paid refundable/ adjustable i.e., will my break-even price be Rs.670/- (strike price plus premium or 620+50=670/-) or Rs.620/-(Strike price).

If your call expires worthless, you simply loose your premium amount!! If you sell your call you get the sale value!! (If the difference is positive you profit otherwise you loose!!)


1.4Q) If after few days, the premium rises to Rs.80/-, do I've to pay difference amount and will my break even price rise to Rs.650/-. And if the premium decreases to Rs.20/- will the difference amount be credited into my account and will the break even price then become Rs.630/-.

Why would you pay the difference when the premium increases!!!!
You have bought a Call and its value is going up, you may ask, do i get the difference!!!
When the premium goes down you simply have a loosing Call option in Hand, no financila transactions take place, unless you sell it!!!
At expiry your break even price would remain the same irrespective of the price movement in between.... 620+50=670, not taking into account the brokerage etc.


1.5Q) In F&O segment, is it sensible to buy at lower premium or high premium?

No opinion about it!!! Is this query for Futures???

1.6Q) If I buy at a low premium, say Rs.10/- and the MTM price raises the premium to Rs.20/- will my loss be restriceted to the initial premium paid or End of day premium.

Your P&L depends on the Market rate vis a vis your purchase rate.

1.7Q) If I wish to sqaure off Call option, do I've to take delivery and then settle in Cash segment or Can I just enter in to opposite transaction i.e., put option.

As replied above, no deliver settlement in India, you settle by cash

1.8Q) I learnt that Option indices are European style i.e., can squared off only on expiration date. Now, my query is Can I square off Option indices (CE), simply by entering into opposite transaction before the Expiration date?

Yes, u can square off with opposite transaction

In the mean time clarify the afore-mentioned queries. If I get further doubts, I'll drop an enquiry.

Thanking you,

Sangfroid22.

Do have a look at this document, may be of help!!

http://www. 4shared. com/file/44137389/8397b5a5/Step_By_Step_Learning.html