Squaring off written puts

rahuul · #1 16th December 2007, 12:42 PM

Hi all,
I had a newbies doubt wrt writing put options.If say,I write the NIFTY 5900 put as I know that the build up of puts at this level offers strong support,I receive a premium of lets say 50.

Once I do this,can I square off my position if the NIFTY moves up?Is the facility to square off available for written puts too?

If in the meanwhile,someone wants to excercise,is it possible that I may be called upon to fulfil the obligation?

The reason why I ask this is , if I have received a 50 Rs/- premium and I am happy with it ,cant I square off when it goes to say 40/- within a relatively short period of time,as I can expect such fluctuations?

I am trying to evaluate the risk in written puts.

aca_trader · #2 24th December 2007, 06:39 PM

Quote:

Originally Posted by rahuul

Hi all,
I had a newbies doubt wrt writing put options.If say,I write the NIFTY 5900 put as I know that the build up of puts at this level offers strong support,I receive a premium of lets say 50.

Once I do this,can I square off my position if the NIFTY moves up?Is the facility to square off available for written puts too?

If in the meanwhile,someone wants to excercise,is it possible that I may be called upon to fulfil the obligation?

The reason why I ask this is , if I have received a 50 Rs/- premium and I am happy with it ,cant I square off when it goes to say 40/- within a relatively short period of time,as I can expect such fluctuations?

I am trying to evaluate the risk in written puts.

Yes you can square them off.
Options are not usually assigned till there is a time-value left in them as it's beneficial for the buyer to sell the "Long Option" in market than exercise it.

Regards,
--Ashish

marcus · #3 24th December 2007, 08:00 PM

Quote:

Originally Posted by aca_trader

Yes you can square them off.
Options are not usually assigned till there is a time-value left in them as it's beneficial for the buyer to sell the "Long Option" in market than exercise it.

Regards,
--Ashish

Ashish nice to see you back

He is talking about a European style option not an american style option, it can only be exercised on expiry day, its not necessary for the buyer to sell the option in the market rather than exercise it, it depends,ocassionally exercising may give higher return than squaring off

marcus · #4 24th December 2007, 08:12 PM

Quote:

Originally Posted by rahuul

Hi all,
I had a newbies doubt wrt writing put options.If say,I write the NIFTY 5900 put as I know that the build up of puts at this level offers strong support,I receive a premium of lets say 50.

Once I do this,can I square off my position if the NIFTY moves up?Is the facility to square off available for written puts too?

If in the meanwhile,someone wants to excercise,is it possible that I may be called upon to fulfil the obligation?

The reason why I ask this is , if I have received a 50 Rs/- premium and I am happy with it ,cant I square off when it goes to say 40/- within a relatively short period of time,as I can expect such fluctuations?

I am trying to evaluate the risk in written puts.

of course you can square off.

As far as exercising is concerned there are two types of options American and European, denoted by A and E, in India all index options are European style and stock options are American style, so in your case its PE as you've written (sold) an index put which is European style.

An american style option gives the buyer the write to exercise his option at any time till expiry while a European style option gives the buyer the right to exercise his option only on a certain date (expiry in this case).

To give you a crude analogy of a PE lets say you're the owner of a railway co. and have sold a customer a ticket, by which he has the right to travel on your train on a certian date, for this option he has paid you money which is akin to a premium. However he can travel on the train only on the date printed on the ticket and no other date, whether he does or dosen't or cancels and sells to someone else you still retain the premium paid and the holder still retains the right to travel on the train on the specified date should he choose to.

As for exercising it is called the assignment function, there is an option in NEAT by which if someone wants to exercise his option at a particular time the NSE system will randomly select a seller from the available sellers at that time, this is completely random and you have know way of knowing if you'll be selected.

please note when you exercise the price considered will be the price at the end of the day and not the time you exercise, even if you exercise in the morning you'll get the closing price which may or may not be different. Thats why its not necessary squaring off will be more benficial than exercising, it mostly is but it may not be.