question regarding european options

i studied in a book that european option only exercise on last thursday of the month. but my friend told that he buy nifty 2800 put opion at 105 and two days later he sell it on 135 .

how is it possible.

some senior member clear my dobts.
thank u.

Exercising and sqaring off are two different things.
Exercising means exercise one's right(option buyer) to buy if it is (call option) or to sell (if it is put option) at the strike price of the option.
squaring off means buying the option which i shorted earlier or selling a option which i already bought.
say if i bought nifty put 2800 put option for 105 rs premium
square off:
i can square off this transaction any time.Say i can sell the same day it self if it goes to 135 at a profit or 100 at a loss of 5 rupees.This is called squaring off.
Exercising :
say if at the expiry nifty is at 2500 then my profit is
2800-2500-105
=195
this is exercising.

ok. thank u.

then what is american option. because all option all calculate in every month thursday. then what is the difference between both option.

reply. it will very useful to me. advance thank u.

All stock options are American options.They can be excercised anytime during the month.
All index options are European and can be excercised on last thursday.

A European option can only be excercised on the expiry date for the month which is usually last wednesday of the month...These include both stock and index options..
An American option can be excercised on any day ( on or before the expiry date)...We follow the American option style in India...

Generally there is a model called the black scholes model..to calculate the valuse of the european options we use this...for american options dont have idea..

Bit of correction to your post pkamalesh.

We follow European style for Index thats why they are named CE/ PE. And for stock options we have American style ( given by CA/ PA in their name).
Option expiry is on last Thursday.. of the month (u can see that in option chain name). If Thu is holiday then it takes place on Wed.. (like christmas 08 time).

Black scholes model is common option pricing model. Option pricing does not change for European/ American options..
Only excercising process is different..

Happy Trading

Thank you, Raja and AW10,

So, if I purchase 1lot unitech 30call @ 2Rs. on5th Feb. and on 10th Feb. Unitech rises to say 35. I will exercise my option and book the profit of 3Rs.(35-30-2). or I may sell my call in the market.

If I purchase 1 lot Nifty 2800call at 125 on 5th Feb. and on 10th Feb. Nifty rises to say 3000. here I cannot exercise my option as it is European style and I have to wait till settlement day or I may sell my call in the market.

That means, the price of the option is depended on, among other things, on the style of the option.

Am I correct?

please also clarify what is the difference between American and European options on settlement day? I am thinking that unexercised options will be squared of at average rate on the settlement day and profit, if any, will be credited to my account( option buyer) in both styles.

please clarify.

Price of option does not depend on its style. When your Unitech option is 5 rs in the money, then the premium will automoatically be more then 5 rs. Option price depends on many factors.
Use can use option calculator to calculate fair price of option.. but mkt price still be few points away from that.. due to sentiments and demand /supply equation in real market.

On the day of settlement, everything boils down to the relationship of Settlment price and strike price. Again A or E style has makes difference here. The net cash amount after settlement
is Debited/credited from yr acct.

For that matter, ALL option ( A/E style) are settled in cash.in Indian mkt. So even if you are excrecising Unitech option before expiry, u are not going to get unitech share in yr acct..
but will get the net cash amount credited in your acc.t.

I know that all at the money and out of the money will expire worthless on expiry date...
I have a doubt ...What happens to my buy options ( in the money)when i didnt square or exercise on expiry day( Due to reasons like i am in remote and i cant open the net or cant call my broker).....Will my broker( ICICI ) will excercise it automatically and will credit to my account ....or if dont excercise on expiry date ( in the money options) then my premium and profit will go worthless.... kindly advice ....

Vijayakumar

On the day of expiry. all ITM options are forced excercised (i.e. settled) by exchange.. even if the option holder does not give any instruction..

So in whatever is net settlement for ITM option, it will be credited into yr acct..(and if u have sold the options and that option had been ITM.. so yr acct will be debited so that exchange can pay the money to buyer of that option).

Happy Trading