DErivatives questions

Friends, I have few clarifications..

The option buyer, will lose the premium anyway, on or before the expiry date when it is in OTM. So, will it be better off to leave it like that , to take a chance whether the option becomes ITM before expiry due to market forces, then the buyer can EXERCISE the option to get some money.

Or By Squaring off, the OTM option is assigned to some other buyer at the then prevailing premium rates, the original buyer can save some of his premium..

so, reduction of percentage of premium loss is the deciding factor here to either square off or waiting to exercising the option..

Is my thinking correct?

John.

Hi,

The question is "why do you buy the option in the first place"?

After all when you decide to buy the option and commit the premium, you must be having some idea about the direction of the market or the particular stock.

Once you are committed, as long as your thinking has not changed, it is better to wait to see if your option gets closer to money. If you lose the premium, that is the risk you take. After all, no risk ... no return !

If however, you feel that the conditions has changed or your view is incorrect, then you can resell the option and get back some premium (less the time decay, effect of IV, less brokerage).

Or, you could sell an higher strike price option and get some money back.

Cheers.

arbeecee.

greetings,

I had (again) a few questions on options

When calculating options through a calculator there are a few inputs like risk free interest, what is that?

Musicjunkie

hi

risk free interest rate is the rate of return you can expect while taking almost zero risk on your capital. In US, it is the 3-months treasury bill rates. It is taken that that the Govt will never default on the papers. and the short term papers carry almost zero risk of interest rate fluctuations.

In India unfortunately we dont have access to treasury bills, though Banks can trade in them.