How Option value calculated on Expiry Day

[Master Trader]

How Option value calculated on Expiry Day..?

 

[mastermind007]

How Option value calculated on Expiry Day..?

This question is only relevant for ITM Options.

Ideally, if Options's strike was S and Closing of the underlying was Y, price of option would have to be at least absolute difference between S and Y. On top of this minimum amount, you would add some element of interest based on distance

However, because of the way taxation around ITM is structured, the market effectively forces all ITM option holders to sell before expiry or incur heavy penalty. All outstanding option writers would become buyers in market that is rigged into their favor.

 

[tradingstudent]

This question is only relevant for ITM Options.

Ideally, if Options's strike was S and Closing of the underlying was Y, price of option would have to be at least absolute difference between S and Y. On top of this minimum amount, you would add some element of interest based on distance

However, because of the way taxation around ITM is structured, the market effectively forces all ITM option holders to sell before expiry or incur heavy penalty. All outstanding option writers would become buyers in market that is rigged into their favor.

Mastermind007,

Could you please elaborate on this , not able to understand the essence.

"All outstanding option writers would become buyers in market that is rigged into their favor. "

THanks

 

[Master Trader]

This question is only relevant for ITM Options.

Ideally, if Options's strike was S and Closing of the underlying was Y, price of option would have to be at least absolute difference between S and Y. On top of this minimum amount, you would add some element of interest based on distance

However, because of the way taxation around ITM is structured, the market effectively forces all ITM option holders to sell before expiry or incur heavy penalty. All outstanding option writers would become buyers in market that is rigged into their favor.

Dear Friend .. My question is different..
Let me tell you all..Thursday I bought Bank Nifty Weekly Option Call at Rs. 24 and sold at Rs. 28 at market close time.
As Option value on expiry day derived from spot in this case Bank Nifty Spot.
Bank Nifty closed at around 18660 hence ideal option value of that Call should be Rs. 60 (18660 - 18600) ...
As I heard Option value on expiry day come from LAST 30 MINUTES weighted average price of Spot Index.
I want to know How that value come exact...I mean Weighted Average Price or Volume Weighted Average Price (VWAP) ... How this system works

 

[rvarada]

Dear Friend .. My question is different..
Let me tell you all..Thursday I bought Bank Nifty Weekly Option Call at Rs. 24 and sold at Rs. 28 at market close time.
As Option value on expiry day derived from spot in this case Bank Nifty Spot.
Bank Nifty closed at around 18660 hence ideal option value of that Call should be Rs. 60 (18660 - 18600) ...
As I heard Option value on expiry day come from LAST 30 MINUTES weighted average price of Spot Index.
I want to know How that value come exact...I mean Weighted Average Price or Volume Weighted Average Price (VWAP) ... How this system works

"Closing price of the futures contracts on the trading day. (closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price of such contract)"
https://www.nseindia.com/products/content/derivatives/equities/settlement_price.htm

 

[mastermind007]

Mastermind007,
Could you please elaborate on this , not able to understand the essence.
"All outstanding option writers would become buyers in market that is rigged into their favor. "
THanks

Answer to the query of tradingstudent is already embedded within the query of Master Trader which is quoted below.

Dear Friend .. My question is different..
Let me tell you all..Thursday I bought Bank Nifty Weekly Option Call at Rs. 24 and sold at Rs. 28 at market close time.
As Option value on expiry day derived from spot in this case Bank Nifty Spot.
Bank Nifty closed at around 18660 hence ideal option value of that Call should be Rs. 60 (18660 - 18600) ...
As I heard Option value on expiry day come from LAST 30 MINUTES weighted average price of Spot Index.
I want to know How that value come exact...I mean Weighted Average Price or Volume Weighted Average Price (VWAP) ... How this system works

lets assume that trader XYZ had written the option that was purchased by mastertrader at 24. Trader XYZ sold him that call option at 18000 strike for 24 and then the price went up to 18660.

Therefore, the actual unit loss that trader XYZ incurred was 36 rs. (Option writers incur infinite loss in theory)

However, since it was expiry day and master trader was forced to close off his ITM option or pay heavy taxes for exercising his gain, his difficulty become trader XYZ's advantage.

Instead of losing 36 rs, trader XYZ managed to purchase the same thing for 27 rs and therefore got away by booking 4 rs loss and staving 32 rs off his liability of written option that turned ITM on him.