If we sell a Put option & dont get a seller to buy what is the situation

ssrinivasa · #1 8th June 2008, 08:18 PM

Hi Friends

If we sell a Put option & don't get a seller to buy
it back,what will be the effect at the expiration date.
Is it necessary to square off the sold Put. ie, buy it back ?

if it is in the money & not in the money?

Please guide me
Sri

leo_3455 · #2 8th June 2008, 08:39 PM

On expiration date, if the position is open, all the in-the-money options are automatically exercised. Out-of-money options expires worthless.

Hope this helps.

ARMHM · #3 8th June 2008, 09:18 PM

Quote:

Originally Posted by ssrinivasa

Hi Friends

If we sell a Put option & don't get a seller to buy
it back,what will be the effect at the expiration date.
Is it necessary to square off the sold Put. ie, buy it back ?

if it is in the money & not in the money?

Please guide me
Sri

Tell what did you sell and I will explain.

AW10 · #4 9th June 2008, 05:10 AM

Quote:

Originally Posted by ssrinivasa

Hi Friends

If we sell a Put option & don't get a seller to buy
it back,what will be the effect at the expiration date.
Is it necessary to square off the sold Put. ie, buy it back ?

if it is in the money & not in the money?

Please guide me
Sri

Hi ssrinivasa,
If you have sold the put, and not able to square off till expiration buying it back.. then you have no choice but to face the inevitable. For eg. if you have sold DLF PUT at 700 and collected the premium. On the day of expiry, say the stock is down to 620 and your position is still open. The real value of this put on expiray is 700-620 = 80 Rs. and you have obligation to pay. As a option seller you have OBLIGATION in hand. As option buyer, you have CHOICE in your hand. Luckily in India, options are settled in Cash so broker will debit your account by amount equal to 80*lot size of the stock.
(In US market, you would have got stocks in yr acct @ 700 and broker will debit your acct as if you have bought the stocks @700)

Options writering is risky and if one knows what they are doing then that is the place to be in options trading. Winning Options traders always write options but they manage the risk very well using other option stratagies. Naked Option writing is strictly no no for most of them.

Hope this is just a questions and not the real trade.

There are ways to adjust this trade and limit your further loss (or maybe make it profitable

provided there is enough liquidity.

Otherwise, Good luck next time.

Happy trading

ssrinivasa · #5 9th June 2008, 09:17 PM

Quote:

Originally Posted by AW10

Hi ssrinivasa,
If you have sold the put, and not able to square off till expiration buying it back.. then you have no choice but to face the inevitable. For eg. if you have sold DLF PUT at 700 and collected the premium. On the day of expiry, say the stock is down to 620 and your position is still open. The real value of this put on expiray is 700-620 = 80 Rs. and you have obligation to pay. As a option seller you have OBLIGATION in hand. As option buyer, you have CHOICE in your hand. Luckily in India, options are settled in Cash so broker will debit your account by amount equal to 80*lot size of the stock.
(In US market, you would have got stocks in yr acct @ 700 and broker will debit your acct as if you have bought the stocks @700)

Options writering is risky and if one knows what they are doing then that is the place to be in options trading. Winning Options traders always write options but they manage the risk very well using other option stratagies. Naked Option writing is strictly no no for most of them.

Hope this is just a questions and not the real trade.

There are ways to adjust this trade and limit your further loss (or maybe make it profitable

provided there is enough liquidity.

Otherwise, Good luck next time.

Happy trading

Thank you for your valuable information....

Regards
Sri.

ssrinivasa · #6 9th June 2008, 09:20 PM

Quote:

Originally Posted by leo_3455

On expiration date, if the position is open, all the in-the-money options are automatically exercised. Out-of-money options expires worthless.

Hope this helps.

Thank you for your valuable information....

Regards
Sri.

ssrinivasa · #7 13th June 2008, 11:53 PM

Hi Friends

What is the meaning for "Naked Option writing" & give me Example.......

Sri

ARMHM · #8 13th June 2008, 11:58 PM

Option writing (selling) or buying without hedging is called naked option.

ssrinivasa · #9 14th June 2008, 12:21 AM

thanks ARMHM

please give me example...it's very much help full

regards
Sri

AW10 · #10 14th June 2008, 12:40 AM

Quote:

Originally Posted by ssrinivasa

Hi Friends

What is the meaning for "Naked Option writing" & give me Example.......

Sri

Sri,
As mentioned by ARMHM, naked options positions is where one has either sold the option without any protection opposite stock, future or option position.
For example
1) naked position -- Sell XYZ 500 PUT Option

2) Covered position -
a) Sell XYZ 500 PUT and Buy XYZ 400 PUT (put spread)
b) Sell XYZ 500 PUT and Sold XYZ future
c) Sell XYZ CALL and Buy XYZ Stock or XYZ Future

Beauty of options trading is that it gives you lot of choice to hedge your position.
It is left to individuals creativity. It is important to understand the way the price of hedging insturments (another option, future or stock) will move with respect to movement in underlying stocks.

Hope it is clearer then earlier.

Happy trading.