difference between exercise and square off?

new2sm · #1 26th October 2007, 05:14 PM

hi,
some query on this dilemma - difference between exercise and square off?
I searched thru net and this forum and I did find some queries and answers to them, though the questioners were satisfied, I am still not sure or satisfied with the answers so here I go.

1. What is more profitable(theoretically, practically, by experience, etc) squareoff or exercise?
2. when to go for which?
3. which one gives more profit and in what situation?
4. how is the calculation done? For this I will take an example. Support if I had PowerGrid Call Option with Strike Price 105 @9.5 premium. On the day of expiry, this contract was @33-40 premium and Spot price was 136-140. which one would have been profitable and how would the calculation be?

Square Off
(Premium@sell - Premium@buy)*lot size

Exercise
(SpotPrice@close - Strike Price)*lot size?
(SpotPrice@sell - Strike Price)*lot size?
(SpotPrice@(depending of your answer) - (Strike Price+ Premium))*lot size?
more permutation......?

For simplicity sake please assume ONLY CALL Option and use the above example.
5. Which of them -square off or exercise is more riskier(market falling as expiry nears due to volatility, time decay, etc)
6. how will the settlement be done in both the cases. I know in case of square of the settlement is diff. bet. premium amounts. in case of exercise diff. bet. (Strike & Spot price)*lot size?

Plus in case of exercise it is a lot riskier since the Spot price is EOD price and not CMP right?

I know these are lot of questions but trust me they must have occurred to all people at some point in the process of trading and this forum is full of them time and again so let this be a definitive thread to close them all. then this thread can be made sticky based on how well it is answered.

so shoot.

Regards.

ranj_2k · #2 26th October 2007, 06:01 PM

It is always better to square off the position when trading volume is there. If liquidity has been stopped, you can exercise the option. In all the cases square off will have edge over exercise.

flyingdeath · #3 26th October 2007, 10:29 PM

Quote:

Originally Posted by ranj_2k

It is always better to square off the position when trading volume is there. If liquidity has been stopped, you can exercise the option. In all the cases square off will have edge over exercise.

I've a few questions

Index Options are Eu in nature and Stock options are American

So does that mean I can excercise my Stock option any time.

Also I can square off the Index options any time I wish. So wht is the difference between EU and American options when both allows me to sell anytime of my choice.

nareshch · #4 27th October 2007, 01:59 AM

Quote:

Originally Posted by flyingdeath

I've a few questions

Index Options are Eu in nature and Stock options are American

So does that mean I can excercise my Stock option any time.

Also I can square off the Index options any time I wish. So wht is the difference between EU and American options when both allows me to sell anytime of my choice.

They both allow you to square off ,but index options doesnot allow you to excercise . Although nifty options are highly liquid,we do have many options with very low volumes and youmay not find a buyer/seller for you to square off.

nareshch · #5 27th October 2007, 02:03 AM

Normally options carry premium till the las day of settlement . Squareoff will be profitable than excercise but if you could nt get a buyer/seller to square off , you may need to excercise to book profits .

Naresh

Quote:

Originally Posted by new2sm

hi,
some query on this dilemma - difference between exercise and square off?
I searched thru net and this forum and I did find some queries and answers to them, though the questioners were satisfied, I am still not sure or satisfied with the answers so here I go.

1. What is more profitable(theoretically, practically, by experience, etc) squareoff or exercise?
2. when to go for which?
3. which one gives more profit and in what situation?
4. how is the calculation done? For this I will take an example. Support if I had PowerGrid Call Option with Strike Price 105 @9.5 premium. On the day of expiry, this contract was @33-40 premium and Spot price was 136-140. which one would have been profitable and how would the calculation be?

Square Off
(Premium@sell - Premium@buy)*lot size

Exercise
(SpotPrice@close - Strike Price)*lot size?
(SpotPrice@sell - Strike Price)*lot size?
(SpotPrice@(depending of your answer) - (Strike Price+ Premium))*lot size?
more permutation......?

For simplicity sake please assume ONLY CALL Option and use the above example.
5. Which of them -square off or exercise is more riskier(market falling as expiry nears due to volatility, time decay, etc)
6. how will the settlement be done in both the cases. I know in case of square of the settlement is diff. bet. premium amounts. in case of exercise diff. bet. (Strike & Spot price)*lot size?

Plus in case of exercise it is a lot riskier since the Spot price is EOD price and not CMP right?

I know these are lot of questions but trust me they must have occurred to all people at some point in the process of trading and this forum is full of them time and again so let this be a definitive thread to close them all. then this thread can be made sticky based on how well it is answered.

so shoot.

Regards.

new2sm · #6 28th October 2007, 07:27 AM

hmm but still I would like to know a question by question answer to my post since I have seen lot of confusion over this plus me already confused. I have myself found(via calculation) that exercise gives more profits than square off. add to that diff. bet. stock and index options and how exercise settlment would differ between them that adds to the confusion. So if some gyani can share his view on the questions in post 1 then it will be a lot of help for us newbies to Options.

Thanks for sharing your experience.

loosingstreak · #7 28th October 2007, 09:05 AM

Where's the dilema?

1) Square off will always be more profitable.

2) Always go for square off , only if you do no find a buyer then you are forced to excercise.

3) Answered in 1 above.

4) As long as the option has time value left always square off. If premium available were greater than strike - spot at any given time a square off it is, if not you are forced to excercise.
If excercised in this case you would receive strike-closing price on expiry day/day of excercise, in case of stocks.

nareshch · #8 28th October 2007, 10:05 PM

Excercise gives more profits than sq.off ????

Quote:

Originally Posted by new2sm

hmm but still I would like to know a question by question answer to my post since I have seen lot of confusion over this plus me already confused. I have myself found(via calculation) that exercise gives more profits than square off. add to that diff. bet. stock and index options and how exercise settlment would differ between them that adds to the confusion. So if some gyani can share his view on the questions in post 1 then it will be a lot of help for us newbies to Options.

Thanks for sharing your experience.

new2sm · #9 29th October 2007, 11:40 AM

ya I mean check this out. I had PowerGrid 105 Strike Price @9.5 premium. At expiry/peak Powergrid stock price was 138-140. and premium was 40 so profits if I had

squared off (40-9.5)*3850(lot size) = 1,17,425
exercise = (140-105)*3850 = 1,34,750

so I feel that exercise might have been better then.

what say?

loosingstreak · #10 29th October 2007, 11:47 AM

Options are assigned at eod closing prices not the high of the day