I have few questions.......

Hi, i hav a few questions about options trading which i will be posting here.
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(not considering the brokerage)
Suppose i buy a call option on XYZ stock trading at 108(market price) ,strike price 110 ,premium 10rs., (1 lot = 100 shares).
(10x100= 1000rs.)
If the market price of XYZ stock after 3 days is 130rs. and premium of 15rs.

Then what will be my profit if i square off my position ?

Your profit /loss is always = (Sell price - Buy price) * Qty. Don't get confused with premium / strike price etc while calculating P&L.
When u square-off such option position, your sell price is = current premium in the mkt.
If you excercise the option you will get the (settlment price of the day MINUS strike price) as Sell price. This price does not have time premium hence it will be less
then the market premium which has extra juice due to time premium.

Another observation, In yr example above - for 22 rs rise in stock, the option premium will not go up by 105 rs. It shd be in the range of 30 rs or so..which has 10Rs of time value (roughly what u paid for OTM strike of 110 when mkt was at 108) and 20 rs of real value (130 mkt price - 110 strike)

Happy Trading.

thnkz for replying but still i am not clear. make it more clear in simple straight terms.
ALSO let me correct my mistake.
the premium rised is 15rs. not 115rs.
sorry it was typing mistake.

now is my profit = selling price - buying price
that is = 130-120= 10rs. per share
that means 10x100 = 1000rs. net profit

OR the profit is premium increased from 10rs. to 15rs.
that is (15-10)xno. of shares
5x100= 500rs.


plz reply soon.

Dear Sameer,

Although AW10 has explained it already but let me explain in more simpler terms.

In this case when you bought the option at 10 Rs premium the underlying was 108. Now you say that when the stock price is 130 your option premium is JUST 15.....this seems to be wrong....Option premium is calculated based on 3 things -

1) Intrinsic value
2) Time value
3) Volatility

In your case when the stock reaches 130 its minimum premium should be 20 Rs. (130-110 strike) considering there is no time value left and no volatility (which is impossible). So it can never be Rs 15 my dear friend...

It will always be more than 20 coz we need to add the time value and volatility...for example its 28 then your profit wud be 28-10=18 points into lot size....

Hope it makes sense...

Take care
Abhinav

Thankz for your reply abhinkoi but i just want to say that i framed a question and supposed, i begun my question with Suppose.

I didnt took exact values but i again thnx u for correcting me.

like AW10 said , if i wait till expiry, will my profit be the stocks price at expiry minus my buying price which also includes the premium cost ?

i,e 130 - 110-10 = 10 rs. per stock

net profit = 1000Rs. ?