Help - how option settlement done. Confused

Hi all,

I am new to options trading. Below is my position now. Could you please explain how much I will loose if the Market price of UNITEC is 25 on 29-jan-09?

My position:

BUY PUT Strike price 30 - Lot size 900 * 2 - Premium @3.30 Paid - 5940

PUT SELL Strike Price 47.5 - Lot Size 900 - Premium @5.00 - Received 4500

So what I am thinking is if the Market price on 29-jan-2009 is 25.
As it is the expiry date both the options will be exercised.

On 29th Jan 2009 if the

1) Premium of BUY PUT (for 30 Rs contract )is 5.30 then I will gain (5.30 - 3.30) *1800 = 3600

2) Preimum of PUT SELL(for 47.5 conract) is 2.00 then I will lose (5-2) *900=2700

Please clarify whether I am correct at calculations?.

I am thinking that the premium diference of the same contract on the buy date and the expirydate is the amount we will lose or gain.

IF my above calculations are wrong then if I lose (Strike price - Market Price) * 900 then I will lose nearly 20000 Rs on the PUT SELL.

Can I reduce my loss by any mean?

Thank you very much for your help

If you square your positions at market rates then it is easy to know your P/L.

Jowever if you allow the Options to expire then the same shall be cash settled by the exchange based on the closing price of the underlying, in this case Unitech.

As presumed by you if Unitech closes at Rs.25.00 then your P/L shall be calculated as follows :

1) Premium of BUY PUT (for 30 Rs contract )is 5.30 then I will gain (5.30 - 3.30) *1800 = 3600

The Put bought by you at 3.30 shall be squared at Rs.5.00 (Strike price 30 - settlement prcie 25= 5) You gain 5-3.30*lot size. Do understand that the person who sold this Put to you stand to loose the same amount.

Premium of PUT SELL(for 47.5 conract) is 2.00 then I will lose (5-2) *900=2700
The Put you sold shall be cash settled at Rs.22.50 (Strike price 47.50 - settlement price 25 =22.50), you loose 22.50*lot size. In this case the person who bought this put from you stands to gain the same amount.

By the way the presumtion that when you Buy a Rs.30 Put at 3.30 then you SELL a 47.50 Put at 3.30 is wrong. The PUT of strike price 47.50 shall be much much higher.
With the CMP at ~30, you have to get a price in excess of Rs.17.50 depending on the time of the month when the transaction takes place.

IMHO : Do go through the basics of the Options again.
Here is a link which may be helpful.

http://www.4 shared.com/file/44137389/8397b5a5/Step_By_Step_Learning.html

At the time of final settlement, mkt price i.e current premium is of no use.
The settlement is based on strike prices and settlment price.

QUOTE]BUY PUT Strike price 30 - Lot size 900 * 2 - Premium @3.30 Paid - 5940

PUT SELL Strike Price 47.5 - Lot Size 900 - Premium @5.00 - Received 4500
[/QUOTE]

So if settlement price is 25 on the day of expiry, then 30 put will be in-the-money by 5 rs (=30-25).. so value of 2 contract will be 5*900*2 = +9000Rs.

Your other option 47.5 Put will be In-the-money by 22.5 rs.. So the value of this option will be = 1*900*22.5 = 20250 rs..
As you sold this hence it is your liability. That means for you it will be -20250 rs.

So the net settlemet will be +9000-20250 = -11250.. of loss.

Please please understand the option pricing mechanism before u sell it next time. You shd have sold 47.5 rs option at much higher price.. The person who bought it from u has made the killing at your cost..

Better luck next time..

Happy Trading

Thank you very much.

I fully understand your explanation. I will go through the material suggested by you.

One thing I want to shout ...


90% of ICICIDirect call centre people are poor at market concepts. Dont take their suggestions to trade :-(

I went through many different materials for one month and by the time of buying I was a bit confused between the LTP Best bid and Best offer prices and asked a suggestion from ICICI direct people.

I gave them specific scenario too.

They looked into the market prices and told me that 47.5 PUT sell will give a prem of 34.00. But later I found that was not true.

This is a best forum where everyone can help and show everyone a better way to go..

Great help friends !!