How to close position in options?????????

kedarvb · #1 14th December 2006, 05:18 PM

All Sr. Members pl confirm my understandings

I understand followings in options, Pl tell is it correct or not

Option position can be closed by 3 ways

I) If i purchase call then i have to write call & vice versa
if i purchase put then i have to write put & vice versa

i.e. BY TAKING REVERSE POSITION

II) Doing Nothing

If i am a Holder of call or put & if on expiry date it is In The Money it will auto exercised & difference will be credited , but if it is Out of the money
it will not get excuted & just cancelled

But If i am a writer of call or put & on expiry date my position is in the money
then naturally holder will not exercise it , then whether my position will be auto cancelled as it is or what HELP PL.

& If i sold put/call & @ expiry date it is Out of the money then holder will exercise the option then difference ( st.price & strike price ) will be debited
to my account IS THIS CORRECT ?

III) exercise of option ( available to Holders only)

Suppose I have purchased call option then can i purchase the given stock ( physically) @ strike price bfr expiry date by exercising the option????

Suppose I have purchased put option then can i exercise it by purchasing that share from the market today & on the same day i sale it @ exercise price or i have to take its delivery first then only i can sale it @ exercise price is this possible

kindly help me to confirm my understandings in options

thanks in advance

waittinggg for replyyy

I wrongly wrote this in futures , if moderator wants then he should delete this from futures , i cannot

Linus · #2 15th December 2006, 03:07 PM

Let's make it simple.

1. A stock is selling at 100. You are bullish about it so you buy a 110 Call by paying a premium of say Rs 8/. When the stock goes to 118 you are breaking even. The stock further moves to 125. So now your gain is Rs 7/ If you want to book profit, you can sell your call, and thus your position is closed. Same thing applies to Puts. If the position goes against you, you will lose the premia.

2. About writing Options: Danger ! Unless you have a very clear idea about what you are doing, forget about writing Options. The pay offs are non linear ie, Option buyer can have infinite profits and a limited loss (the premium which he pays), whereas Option writer faces an infinite loss and a fixed profit(the premium which he receives from the buyer).

I suggest you first thoroughly understand everything about Options before venturing into it...

Regards,

Sunil Saranjame aka Fibo. www.fibonacci1321.blogspot.com

ivanboesky · #3 15th December 2006, 03:18 PM

Quote:

Originally Posted by sunil saranjame

Let's make it simple.

2. About writing Options: Danger ! Unless you have a very clear idea about what you are doing, forget about writing Options. The pay offs are non linear ie, Option buyer can have infinite profits and a limited loss (the premium which he pays), whereas Option writer faces an infinite loss and a fixed profit(the premium which he receives from the buyer).

I suggest you first thoroughly understand everything about Options before venturing into it...

Regards,

Sunil Saranjame aka Fibo. www.fibonacci1321.blogspot.com

Sunil, the payoffs are non linear if you buy or sell options.

kedarvb · #4 15th December 2006, 03:56 PM

Thanks for attentation.

But if i am not wrong ( DONOT KNOW WHETHER WWRONG OR NOT ),
Then following ARBITRAGE OPPOURTINITIES are possible

Position Holder of call option
share price 1000Rs.
Exercise Price 950 Rs
Premium 30Rs

Action of arbitrager :-
Purchase call @ 30Rs.
Exercise it immediately @ 950 i.e. take delivery of shares @ 950
Immediately sale the same holding in the market @ 1000

Net profit= 1000-950-30=20Rs

My doubt is can Arbitrager do all this witjin a day or he have to wait for delivery ( i.e. T+2 days), also can we ask for physical delivery in option???

Position Writer of call

share price 1000Rs
Exercise Price 950Rs
Premium 60Rs

Action of Arbitrager

Purchase share from mkt @ 1000Rs
Write call option & get 60Rs

If @ end if st. price goes to 1200, holder will exercise the call

So positon of Arbitrager is:-
Profit=60Rs(Premium)
Loss = 1200(stock price) -950(ex.Price)=250Rs
now, Arbitrager has allready shares @ 1000 so he will sell it @ 1200 in mkt
& earn profit of 200Rs

So net Profit= 60-250+200=10Rs

This thing can be done with futures also despite taking position in mkt.

ALL MEMBERS PL. PAY ATTN. & TELL WHETHER IT IS CORRECT OR NOT

ivanboesky · #5 15th December 2006, 04:06 PM

In India, all options are cash settled. You cannot ask for physical settlement. Even if you purchase and then exercise the option intra-day, you will get the difference between the strike price and the end of day closing price. So you are exposed to the risk of the price moving against you during the day.

Linus · #6 15th December 2006, 04:41 PM

Quote:

Originally Posted by ivanboesky

Sunil, the payoffs are non linear if you buy or sell options.

Yes Ivan,

I was just pointing out the big difference between writing and buying, to him(Kedar).

Tnx,

Sunil.

Linus · #7 15th December 2006, 04:50 PM

Hi Kedar,

May I suggest you to go through the excellent articles on Options in www.investopedia.com One more good link is www.numa.com where they have outlined 17 strategies in a very simple way.

Regards,

Sunil.

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