What happens when you BUY a PUT Option without owning the underlying stock?

I'm a beginner and learning about Options trading and interested in it more than Futures, which I find very risky.

I'm mostly interested in intraday trades on Options of largecap bluechip NIFTY stocks and booking the difference in the premium as my profit (or loss!).

But suppose I'm holding a PUT Options Contract till Expiry. Then what? For example, let's say I'm bearish on Axis Bank stock and I BUY the 30-May-2013 1480 PE Contract at a premium of Rs 50, since I hope the price of Axis Bank will stay below Rs 1480 for the rest of May. The lot size is 250 and my breakeven point is Rs 1430. Now, suppose my prediction goes right and on Expiry day Axis Bank quotes at Rs 1400 per share and my PUT Option is profitable by Rs 7500 (Rs 30*250).

But, at the same time, I don't have any shares of Axis Bank in my Demat account holdings, whereas the PUT Options contract means I have to sell 250 shares since I have continued holding it till Expiry.

Now what happens? Will this contract get exercised automatically by the Exchange? But I don't own any Axis Bank shares! If I become "SHORT" in it, do I become "SHORT" in its Futures (which I want to avoid)? (since shorting in Cash is allowed only intraday). Or will I be forced to BUY 250 shares of Axis Bank from the market at the market price of Rs 1400 with my own money and sell it at Rs 1480?

Can someone explain what basically happens?

Thanks!

Do not worry.The difference between the closing price and the strike price after taxes and other deductions will be credited to your account. You need not have any stocks in your account for trading in options or futures. Trade carefully, best of luck.

Thanks for your response.

Have another query, though. Mostly, my confusion has come after reading the following page on NSE's website:

http://www.nseindia.com/products/content/derivatives/equities/settlement_mechanism.htm

Can't understand what they are trying to say in the "Daily Premium Settlement" and "Final Exercise Settlement" sections...!

When you BUY an Option (CALL or PUT) and DON'T square off intraday and hold it for say, a couple of days. Then, are the changes in the premium credited (if profit, ie. premium of purchased Option gone up) and debited (if loss, ie. premium gone down) from your account on a day-to-day basis? How is this possible, since I have heard that the loss potential of an Option Buyer is limited only to the premium he paid?

And what happens when you SELL an Option (CALL or PUT), in other words, Option Writing? Now, I know that Option Writing is just like entering a Futures Contract and is equally risky. But, what amount is credited or debited from the account of an Option Writer on a daily basis? Since, he already starts off by receiving the premium paid by the Buyer, how does he get any more money??? Isn't the profit potential of an Option Writer limited only to the premium he received?

Thanks for your response.

Have another query, though. Mostly, my confusion has come after reading the following page on NSE's website:

http://www. nseindia.com/products/content/derivatives/equities/settlement_mechanism. htm (The website mods don't seem to allow links, so remove spaces!)

Can't understand what they are trying to say in the "Daily Premium Settlement" and "Final Exercise Settlement" sections...!

When you BUY an Option (CALL or PUT) and DON'T square off intraday and hold it for say, a couple of days. Then, are the changes in the premium credited (if profit, ie. premium of purchased Option gone up) and debited (if loss, ie. premium gone down) from your account on a day-to-day basis? How is this possible, since I have heard that the loss potential of an Option Buyer is limited only to the premium he paid?

And what happens when you SELL an Option (CALL or PUT), in other words, Option Writing? Now, I know that Option Writing is just like entering a Futures Contract and is equally risky. But, what amount is credited or debited from the account of an Option Writer on a daily basis? Since, he already starts off by receiving the premium paid by the Buyer, how does he get any more money??? Isn't the profit potential of an Option Writer limited only to the premium he received?

Thanks for your response.

Have another query, though. Mostly, my confusion has come after reading the following page on NSE's website:

www . nseindia.com/products/content/derivatives/equities/settlement_mechanism . htm (Remove spaces in link!)

Can't understand what they are trying to say in the "Daily Premium Settlement" and "Final Exercise Settlement" sections...!

When you BUY an Option (CALL or PUT) and DON'T square off intraday and hold it for say, a couple of days. Then, are the changes in the premium credited (if profit, ie. premium of purchased Option gone up) and debited (if loss, ie. premium gone down) from your account on a day-to-day basis? How is this possible, since I have heard that the loss potential of an Option Buyer is limited only to the premium he paid?

And what happens when you SELL an Option (CALL or PUT), in other words, Option Writing? Now, I know that Option Writing is just like entering a Futures Contract and is equally risky. But, what amount is credited or debited from the account of an Option Writer on a daily basis? Since, he already starts off by receiving the premium paid by the Buyer, how does he get any more money??? Isn't the profit potential of an Option Writer limited only to the premium he received?

It happens only for futures and not when you buy options. In case of options they are talking of net premium. i.e you have purchased at say Rs10/- and sold at Rs15/-, a net of Rs 5 will be credited to your account. If you have only purchased, then Rs 10/- will be debited to your account and the opposite if you only sell on the particular day. Suggest not to get into option writing at this early stage.