Hi there and help on options

#1
Hi All,

Just joined and look forward to learning a lot here. Here is my investment story.

Started investing in 'blue chip' equities in March 08, was losing 54% of investment by March 09, then gathered courage to book a loss of 35% and switch to high beta shares from April 25th to May 15, which God (and some hunch/research) inspired decision recovered my investment by selling out entire portfolio on 4th June with a modest net gain of 10%, just about equal to the bank interest I would have earned, but what a relief. I go back to the
portfolio before the switch at today's rates and see it would still be incurring about 20% loss.

The story repeated again as I started re-investing in June and was soon
carrying a net loss of 30% when the market bottomed to 13400. Held my losses and panicked to get out again at 15000 with a moderate profit, though market had still some steam left.

My view is it will bottom to 14000 or lower once more anytime from here to
November, though the growth story will continue after the dip. I am invested
37% of funds, rest is reserved for buying on correction.

Meanwhile I dived into derivatives today for the first time and went and SOLD two call options covered by the stocks I hold, which is why I joined this forum, as even the dealers of my reputed Security agency seem very confused about advising me on SOLD call options.

Can some benevolent soul advise me on the following

1) Must I take some other action, till expiry date 27th August. I don't want to, as only two things can happen (academically speaking, but I don't know how it is settled here). The option gets exercised if the strike price is reached, and I am cool with that since I can offset any margin debited to my account by selling the held stock. The other thing that can happen is that the strike price is not reached and the option written by me expires unexercised. The question is there any procedural compulsion for me close this deal by doing another deal ?

2) when will the option premium ( the sale price of the call options SOLD by me be credited to my account).

I don't need to learn any option basics or the option buyer's perspective here.
Just advice for my specific position. The underlying scrips are currently trading
around 10% below the strike price and may or may not cross the strike price by 27th august.

Thanks and love to all,
 
#2
Writing covered call - procedural aspects

Okay, I found most answers to my doubts from
https://secure.icicidirect.com/trading/FNO/FAQ-Futures.htm
so my query may be treated as closed, except for one itsy bitsy query at the end of this post.

It will be totally elementary for the experienced folks here but the issues I had were very troubling for someone like me who was doing an option deal for the first time. The fundamental procedural lowdown on selling covered equity call options in India is

1. Even if you own the shares in your demat a cash margin is required. For selling equity calls, a hold on shares is not accepted.

2. Even if you own the shares which are the 'underlying' for writing a 'covered' call, your 'cover' is like a collateral you have, the deal will still be settled in cash.

3.The downside is, if the call is in the money and exercised before expiry, exchange will 'buy' the shares at closing price of the day (which could be at the peak for the week, if you are unlucky) and 'sell' at the strike price, debiting the net amount to your bank account. In the US they take delivery from your demat, thus the cost remains your purchase price.

4. In the above eventuality, you must rush to sell your shares separately, before they fall below the price at which the exchange bought them, otherwise your loss will increase. Unless of course you have a further bullish view and want to run the risk, in which case you might as well have written a naked call.

5. Even if the call is not exercised, if it is in the money on the expiry day, the exchange will exercise as above and debit the difference to your account.

6. You do potentially make money even upon settlement at in-the-money position, because of share appreciation, since you hold the shares and would have written a call with strike above your cost, but the cash settlement compulsion does introduce a slight additional amount of additional risk in the process, that your realisation upon sale of your 'cover' shares may be below the 'buy' price used by the exchange for the settlement.

7. Premium is credited on T+1. Initial Margin is also debited on T+1.

8. On a daily basis, margin requirements are re-calculated, and additional margin may be debited/refunded to your account from time to time, heavily increasing the number of transactions in your bank account.

9. Upon expiry or exercise the margin is netted off from the loss and balance refunded. Ultimately the net debit/credit in your account is your loss minus the premium you received, if strike price is reached on or before expiry, or only the premium credit in your account in case the call is never in the money, ie the strike price is not reached till expiry.

10) The shares you bought as cover remain in your demat for you to dispose as per your perception. The exhange/security agent/broker is not bothered if you are hedged or not, since you have to deposit the margin in cash.

10.If you are trading online, the call option sale will not go through unless you have created the required hold on the balance in your account.

11. For taxation purposes, the premium received is profit, and the settlement amount debited is loss.

12. If you have a long term bullish view on the stock, and have sold at a fairly high strike price for a nearby expiry,there is no need to take any further action after selling the call, as long as the underlying is trading below the strike price. You will probably not be assigned and will be able to keep the premium as net profit.

13.Squaring off (buying a similar call that you sold and paying the premium) will usually result in a loss or negligible profit, though it will protect you from the loss on settlement which could be greater than the premium you received.

The one doubt left in my mind is what is the button 'convert to delivery'
for, right next to 'square off' and should I exercise that option ? what are the implications in various scenarios ?

Hopefully someone will reply before I find an answer to this myself.

Love to all....
 

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