How to settle Options?

new2sm · #1 11th October 2007, 11:37 AM

Hello all gurus,
am new to Options so asking forgive my newbie status. I have 105 Power Grid Options @9.5 premium. I would like to book profits @120. Can somebody tell me what steps to follow so that I get the cash without first paying for the entire lot. I use icicidirect and it has two options in the Order Book namely "Exercise" and "Square off". Which one should I choose so that the above is possible.

Thanks in advance and pppppppplease reply asap and share your knowledge.

Regards.

ranj_2k · #2 11th October 2007, 12:30 PM

You should square off the option position whenever the prices go above Rs.9.5 then only you will be in profit. Even, squaring off at Rs.10 (if price go to this level) will give you good profit.

new2sm · #3 11th October 2007, 12:41 PM

thanks rank_2k for helping me out. I believe exercise would mean buying the complete lot all in cash right?

one more thing. if PG's market price becomes say 125 then wouldn't trading in my lot stop? in which case would Premium ever go on increasing? say by the time the market price becomes 120-125 the premium on my lot is 9.4, and the market price of PG keeps on increasing, will the premium go on increasing even if no qty is on offer? can I still square of or habe to wait for expiry. believe squaring off should be possible but still asking.

thanks once again 4 u help.

new2sm · #4 11th October 2007, 12:43 PM

just one more small doubt. the square off form asks for Limit Price. I should enter premium value i.e 10 or 11 rs and not desired spot price i.e 120 or 125 rs right? also how much profit will I make if I sell @11 rs LTP reaches 11 on a lot size of 3850, buy LTP 9.5?

biyasc · #5 11th October 2007, 12:48 PM

Quote:

Originally Posted by new2sm

just one more small doubt. the square off form asks for Limit Price. I should enter premium value i.e 10 or 11 rs and not desired spot price i.e 120 or 125 rs right? also how much profit will I make if I sell @11 rs LTP reaches 11 on a lot size of 3850, buy LTP 9.5?

if it goes to 11 then you will make 11-9.5*3850-brokerage charges.

but if it comes to 5 then you will lose 9.5-5*3850+brokerage charges.

ranj_2k · #6 11th October 2007, 01:04 PM

Strike price of PG is Rs.105 and you have paid premium of Rs.9.5. The current price is Rs.10.50. It means you are at a gain of Rs.3850. If you are bullish on PG and expecting that spot price will go upto Rs.120 then your call premium price will go accordingly. However, please be aware that in 7/10 last days before expiry, premium price will start matching with spot price. I mean to say that call price will start decaying.

new2sm · #7 11th October 2007, 01:46 PM

Quote:

Originally Posted by ranj_2k

...However, please be aware that in 7/10 last days before expiry, premium price will start matching with spot price. I mean to say that call price will start decaying.

You mean to say if my options expire on 25th Oct. I won't be able to sell on say 23rd Oct? or you meant that premium wont raise anymore or even if I square off nobody will buy? if no buyer exists then what are my options(no pun intended)?

rkkarnani · #8 11th October 2007, 03:26 PM

Quote:

Originally Posted by new2sm

You mean to say if my options expire on 25th Oct. I won't be able to sell on say 23rd Oct? or you meant that premium wont raise anymore or even if I square off nobody will buy? if no buyer exists then what are my options(no pun intended)?

(Brokerage etc.not taken into account in the example below))
If Power grid SPOT price on expiry i.e. o 25th Oct. (the setttlement price as specified by NSE, which is the last 30 minutes avg. traded price) is more than 105+9.5 you gain.
In India nothing in options results in delivery. Even if you do not square your position till expiry and your call is in the money, i.e. PG rates are more than 105 you get the difference i.e. PG ratesminus 105 X lot size is your profit.

YOU ARE NOT ASKED TO TAKE DELIVERY OF THE UNDERLYING STOCKS

If PG ends at say 120 you get 120-105=15XLot size

new2sm · #9 11th October 2007, 03:40 PM

thanks rkkarnani...that helped clear a lot of things
just one last stuff. how is your method of calculating the Sum I will get i.e using Spot Price different from ranj_2k method i.e using LTP/Premium?

my apprehension is that the difference between Premiums may not exceed Spot Price differences. Is it true?

ranj_2k · #10 11th October 2007, 04:23 PM

In case you do not square off your position. Following you will get -
Powergrid Strike Price = Rs.105
Premium paid = Rs.9.5
Total Cost = Rs.114.5
If closing price of Powergrid on derivative expiry of this month = Rs.120
Gain = Sale price Rs.120 - Buy price Rs.114.5 = Rs.5.5
Total Gain = lot size x Rs.5.5 = 3850 x 5.5 = Rs.21,175
Brokerage not considered.
Today closing price of 105 call is Rs.13.9 and you are already gaining Rs.15000.
You can square off the position any time you want before expiry, in that case your gain will be difference in premium x lot size. On today closing, you are gaining in premium of Rs.3.9 x 3850 = Rs.15015.