In fut What happens to counterparty when you square off your position before expiry?

#1
Hello all!
I am new to Derivatives. I know in order to close your open position you have to take the opposite position. But happens to your counter-party??

For example,
--> On 15th Nov A long on 3 lots in November Nifty future that expire on 27. B takes a short position for 3 lots.

--->A wants to square off on 18 Nov with decent gain. Gets his Margin+Profit.

--->Here is my doubt. But what happens to B?? Just because A wants to square off, B doest not have close his position?!

So does he has to close his position compulsorily or he will get a new counter party??

Thanks guys!!
 
#2
Re: In fut What happens to counterparty when you square off your position before expi

Hello all!
I am new to Derivatives. I know in order to close your open position you have to take the opposite position. But happens to your counter-party??

For example,
--> On 15th Nov A long on 3 lots in November Nifty future that expire on 27. B takes a short position for 3 lots.

--->A wants to square off on 18 Nov with decent gain. Gets his Margin+Profit.

--->Here is my doubt. But what happens to B?? Just because A wants to square off, B doest not have close his position?!

So does he has to close his position compulsorily or he will get a new counter party??

Thanks guys!!
A wants to square off his long position so he sells 3 contracts to C and a C buys 3 contracts and there by position of A gets squared off .Now A is out of picture and the position stands as follows :

C Long 3 contracts ( here we can have even a case of C,D and E long one contract each )

B Short 3 contracts....

Smart_trade
 

sibu3168

Well-Known Member
#3
Re: In fut What happens to counterparty when you square off your position before expi

Hello all!
I am new to Derivatives. I know in order to close your open position you have to take the opposite position. But happens to your counter-party??

For example,
--> On 15th Nov A long on 3 lots in November Nifty future that expire on 27. B takes a short position for 3 lots.

--->A wants to square off on 18 Nov with decent gain. Gets his Margin+Profit.

--->Here is my doubt. But what happens to B?? Just because A wants to square off, B doest not have close his position?!

So does he has to close his position compulsorily or he will get a new counter party??

Thanks guys!!
When you squared up your position, then the risk will transfered to the new buyer/buyers and the former seller/sellers. At the end of the settlement (expiry day), all positions will be closed compulsorily with the closing price of underlying asset.
 
#4
Re: In fut What happens to counterparty when you square off your position before expi

Suppose only 2 (two) party exist - 1 seller and 1 buyer. what happen in this hypothetical case, if one party want to close his trade before expiry ?
 
#5
Re: In fut What happens to counterparty when you square off your position before expi

Suppose only 2 (two) party exist - 1 seller and 1 buyer. what happen in this hypothetical case, if one party want to close his trade before expiry ?

WoW interesting ! No one know this answer?
AGAIN -
If only A and B is exist in this Option market (suppose), A sell to B and build a contract. In this case Open Interest is 1. What happen if A want to leave the trade anytime before expiry? What would be the case in respect of B?

The situation may be as follows --

a) A is in profit, B is in loss
b) B is in profit, A in loss
c) No one in profit

Can anybody solve my problem?:confused:
 

manishchan

Well-Known Member
#6
Re: In fut What happens to counterparty when you square off your position before expi

Suppose only 2 (two) party exist - 1 seller and 1 buyer. what happen in this hypothetical case, if one party want to close his trade before expiry ?
As you urself pointed out.. the question is hypothetical. Just take it that this will NEVER happen ... why ?? Do you think that a time (EVER) will come when there are only 2 parties (1 buyer and 1 seller) in the market. Never.. right ?

Further.. if at all.. (0.0000000000000000000000000000000001 % chance) there are only 2 parties in the market.. why would u even think in ur dream to do trading in dt particular script/market. Trading is to buy so that you can later sell right.. or vice versa. :D

So dtz where volume/Open interest comes in picture. Google out more about this.. coz the scenario you are asking and saying dt "Nobody knows the answer" is stupid.. !
 
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#7
Re: In fut What happens to counterparty when you square off your position before expi

As you urself pointed out.. the question is hypothetical. Just take it that this will NEVER happen ... why ?? Do you think that a time (EVER) will come when there are only 2 parties (1 buyer and 1 seller) in the market. Never.. right ?

Further.. if at all.. (0.0000000000000000000000000000000001 % chance) there are only 2 parties in the market.. why would u even think in ur dream to do trading in dt particular script/market. Trading is to buy so that you can later sell right.. or vice versa. :D

So dtz where volume/Open interest comes in picture. Google out more about this.. coz the scenario you are asking and saying dt "Nobody knows the answer" is stupid.. !
Thanks for your reply Manish bhai, I know that you are GENIOUR ENOUGH of Indian Market and I too know that Indian Option market is liquid enough to trade. I just want to know, what is the provision in Exchange if such adverse scenario will arise. Does EXCHANGE plays the role as counter party?
I am attaching a snapshot of Nifty. In this snap if I am buyer (or seller) then who is seller (or buyer)? Market Maker ? who is that? NSE ? If no 3rd party will interested to participate in this script till expiry, then what will happen with reference to my earlier question? I think you got my point. Sorry again for my IDIOT question. It will be my pleasure to learn something from a GENIOUS like you..
 

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manishchan

Well-Known Member
#8
Re: In fut What happens to counterparty when you square off your position before expi



Thanks for your reply Manish bhai, I too know that Indian Option market is volatile and liquid enough to trade. I just want to know, what is the provision in Exchange if such adverse scenario will arise. Does EXCHANGE plays the role as counter party?
I am attaching a snapshot of Nifty. In this snap if I am buyer (or seller) then who is seller (or buyer)? Market Maker ? who is that? If no 3rd party will interested to trade in this script till expiry, then what will happen with reference to my earlier question? I think you got my point?
Let me give u an example.. dt should clarify your doubt :

Lets say you own a flat which you bought for 50 lakhs. Now for some reason you want to sell it off in next 1 month (relate it to expiry). Apparently.. the real state is down.. and the area where you have your flat, doesn't have future growth.. so no body is interested in buying. What do you do.. how would u get the customer ?? Where will they come from ??

Scenario # 1 : You have to keep looking for a buyer.. or hold it till such time when news/other factors start to show dt ur property values is worth more than 50 laks. Now suddenly u will see numbers of buyer showing up.. where did they come from ?? Where were they before ?


Scenario # 2 : You can't keep looking for buyer.. its an emergency for you so even if you get 25lakhs for dt flat, you are ready to sell. You put an add for sale.. 25 lakhs for a flath which is worth 50 lakhs.. and suddenly numbers of buyer show up.. where did they come from ?? where were they before ??



Now back to your scenario dt you posted. 4500 calls options for June 2015 expiry..

Right now you may not find any ask or bid (buyer or seller) why coz dt level is way tooooo far. So buyers and sellers don't know if they buy/sell dt calls will they profit from that or make loss. The basic reason for trading the market is to make profit.. so why to trade something dt is sooo unsure. That is why u will see dt buyers and sellers are most active in the most current strikes.


Now letz say you still want to buy that 4500 call. Where will u get the seller from.. who will sell ?

No body is selling now.. so if you put a buy order in ur terminal.. it will jst be pending untill such time that another person (could be nyone like u) thinks dt it is worth selling dt strike. So u will find a seller and ur order will get fulfilled. In case you cancel your order before someone places sell.. then his sell order will continue to be pending (remember that flat wala scenario.. )


I hope ur doubts are just to understand the logic and they are clear now (hopefully :D)

Also.. Exchange is just like market place where buyers and sellers meet. They have no role in who'z buyin.. why buying who he is etc. Itz like a vegetable markets (in crude sense).. where there are buyers and there are sellers. In vegetable market u can go and sell potatos.. or you can go as customer and buy potatoes from others. Market doesn't care who is buying and who is selling .. but if you buy or sell then they will charge u some taxes/maintenance etc (in stock market we hv taxes..brokerage etc) charges.
 
#9
Re: In fut What happens to counterparty when you square off your position before expi

Thank you again Manish Bhai for your detail analysis. I got your 2nd point.
Suppose I am SELLER and make the trade at 50% loss in that script. My order got filled accidently by my wrong command. Now I want to exit from this trade by booking my loss. If opposit party is (the ONLY 2nd PARTY) or no one offer further BID / ASKED in that particular script, then how can I leave my trade before expiry ?
 

manishchan

Well-Known Member
#10
Re: In fut What happens to counterparty when you square off your position before expi

Thank you again Manish Bhai for your detail analysis. I got your 2nd point.
Suppose I am SELLER and make the trade at 50% loss in that script. My order got filled accidently by my wrong command. Now I want to exit from this trade by booking my loss. If opposit party is (the ONLY 2nd PARTY) or no one offer further BID / ASKED in that particular script, then how can I leave my trade before expiry ?
Same answer..

If you are a buyer.. u need a seller

If you are a seller.. u need a buyer.

If both don't meet.. no trade. Ur order is pending.


In ur case.. as the expiry nears you will start to see bidders.. may not be at the same price. so then u can get out.


Well.. now I guess what I posted above and here should be enough for anyone to understand. But if u still hv doubt.. I'm not sure what exactly u are gettin at.

Mention exactly what is your intention of such hypothetical questions ? Point is .. why to break our head unnecessarily.. when such situation will never occur :D


I dnt know if u are planning to buy dt June 2015 strike ??? If yes.. DON'T do dt. Buying/selling tooooo far options expiry will damage u.. u dnt knw where the market will be next June 2015. Also no liquidity.. coz no buyers/sellers there.. if you want to buy potatoes.. will u go the market where there are no potatoes sellers ?? Similar things.. if u want to trade.. trade in the liquid options/derivatives... why u thinking of the one where there are no buyers/sellers..
 

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