How to settle Options?

new2sm · #11 11th October 2007, 05:06 PM

hmm but this is where the problem starts.
if I take your method for todays close I get

(13.40-9.5)*3850 = Rs. 15015

but if I take rkkarnani's method I get

(114.85-105)*3850 = 37922.49

OR

(114.85-(105+9.5))*3850 = 1347.49

None of which match. which one is used by icicidirect/NSE and what sum will I get if I had sold today on closing.

thanks for all the help you are extending.

ranj_2k · #12 11th October 2007, 05:20 PM

I also have icicidirect and also doing option trading regularly for one year. My calculations are correct, if you would have squared off the position at today closing price of Rs.13.4, your gain will be only difference in premium price i.e. Rs.3.9 x lot size = Rs.15015.
Mr Karnani has not considered the call premium paid by you in his calculation. Just calculated the difference of closing price on expiry and strike price and multiplied with lot size which is not correct.
Please note that Call option is nothing but you are paying some premium over strike price (considering current market price) and taking call. So it must be added to the cost.
Hope matter is clear to you.

new2sm · #13 11th October 2007, 05:44 PM

hmm sounds ok. thanks for all your effort and patience.

just offtopic, dont you think that in case of settlement, premium must be part of Strike Price and NOT over and above the Strike Price. So my profit should be sell price - strike price(which incl. premium now that I have already done part payment) and not sellprice - (strike price + premium). the reason am saying this is that after reading all materialon Options trading on the net which gives the standard House buying example. I pay token amount of say 10,000 rs to book the house of 10lakhs . If I wish to buy the house I will simply pay the balance and if I do not wish to buy, I have to forgo the token amount paid. same should apply to Options.....wonder why we are paying additional amount over and above the Strike price....neways....

ranj_2k · #14 11th October 2007, 06:00 PM

Call Option is not the token amount when you want to book a flat. Assuming that price of flat will increase by month end from Rs.10 lacs to Rs.11 lacs, you are paying Rs.10,000 instead of Rs.10 lacs to have right over the property and if prices goes to your expection level of Rs.11 lacs, you gain Rs.90,000. If prices go down to Rs.9 lacs. You will forego your premium of Rs.10,000 only and not make the loss of Rs.90,000. This is the benefit of taking call. Profits are unlimited but losses are just premium amount. So always deep call (paying very less) to gain maximum if it clicks.

ranj_2k · #15 11th October 2007, 06:09 PM

A GOOD EXAMPLE OF CALL OPTION
A local newspaper advertises a sale on VCRs for only $129.95. The next day Jane goes down to the electronics store intending to purchase a VCR at the advertised price. Unfortunately, by the time she arrives, the VCR is already out of stock. The manager apologizes and gives her a rain check entitling Jane to buy the same VCR for the advertised price of $129.95 anytime within the next two months. Jane has just received a long call option which gives her the right, but not the ob ligation, to purchase the VCR at the guaranteed strike price of $129.95 until the expiration date two months away.

Scenario 1: A few weeks later, Jane return's to the store to exercise her rain check. The same VCR is now in stock, priced at $179.95. Jane approaches the store manager who agrees to honor the rain-check and sell her a VCR for the advertised p rice of $129.95. Jane has just saved $50. Her long call option was in-the-money.

Scenario 2: A few weeks later, Jane returns to the store and finds the VCR on sale for $119.95? Her rain check is now worthless because she can simply purchase the VCR at the reduced price. In this case, Jane's call option expired worthless b ecause it was out-of-the-money. Just because you own a long call option doesn't mean you are under any obligation to use it.

Scenario 3: Jane's friend Jeff phones and mentions that his VCR has just broken. She tells him about her rain-check and agrees to sell it to Jeff for $5 (the option premium). The strike price is still $129.95 and the expiration date is 2 month s out. However, Jeff is taking a risk. The VCR might be priced lower than the $129.95 strike price in which case the rain-check is worthless and Jeff loses $5.

new2sm · #16 12th October 2007, 11:33 AM

excellent ranj_2k...excellent cleared all my doubts so from Jeff's point of view though he can buy the VCR @129.95 his actual cost will be 129.95+$5 he gave to Jane. excellent example. thanks for all your help.

biyasc · #17 12th October 2007, 11:34 AM

Ranj, you are too good man.

ranj_2k · #18 12th October 2007, 11:37 AM

Still holding call or booked your profit?

new2sm · #19 12th October 2007, 12:09 PM

actually I don't know.

I clicked icicidirect's square off button and put 20 in Limit price. After that I cannot see "Square off" cancellation etc button. there is only one "Exercise" link for that Option. What to do, how do I cancel my Square off request?

ranj_2k · #20 12th October 2007, 12:17 PM

Please go in F&O section -> Order book -> Option -> see the status of order. If executed okay. If you want to cancel the order, you can cancl or modify the order from here.