Short Selling Options

Hi traders i have a questions regarding Short-Selling stock options.

let me take a real example here.

I sold Unitech Put options of March- strike price of 85 is at 11.10.

My questions:

1) on the expiry day if the closing spot price is at 5 and cash market price is at 75 rs, will get the profit between the sold spot price(11.10) and buy spot price(5). If yes, yipeee :thumb:

2) If not, would NSE calculate the difference between Market cash price(75) and strike price(85) and give me the profit/loss

3) Now let say the spot price is at 13rs would NSE caculate the difference between Spot price(13) and the difference between Market cash price and strike price (85 - 75 = 10) and give me the profit/loss. Basically 13 - 10 = 3.

Really confuse.. kindly please advise.

You mean to say that you bought UNITECH 85 PUT , believing that the stock would go down and paid Rs. 11-00 premium OR you are 'writing' the UNITECH 85 PUT receiving Rs. 11-00 in upfront?

Because your question implies that you want play short on UNITECH.

If you are short on UNITECH by the way of buying 85 PUT then the answers would be...

1. On the expiry day the spot price would be considered for the difference between spot price and strike price.. hence

Rs.85 (Strike price) - Rs.75 (Spot price) - Rs. 11 (The premium you paid to buy the PUT) = Re. -1.00 (You would be in net loss of Re.1).

2. When you refer SPOT PRICE that means the actual price of the underlying stock and not the premium. And if the spot price is Rs. 75 then the closing premium would not be more then Rs.10-00

In conclusion if you are buying UNITECH 85 PUT for Rs. 11-10 premium, the stock would be required to close at or below Rs. 74-90 (Rs.85 - 11.10) for break-even and profit thereafter (I have not considered the brokerage in the calculation).

Dear Tigerji

1. On 23.03.10, Put Option of March - strike price of 85 Strike is Rs.13.55. Position is in loss of 2.45 points (4500x2.45 = 11,025). Put value will increase if Unitech spot price will go further below.

If the Put prices is 5 at expiry, as assumed by you then position will be in profit (11.10-5=6.1 x 4500 = 27450).

2. Yes, NSE would calculate difference between 85-75 = 10. However, you have already sold put at 11.10. So buying price will be 10 and loss will be (11.10-10 = 1.1 x 4500 = 4950).

3. No it is not calculated like that. If you have squared up your position before expiry then you will gain / loss difference between sell price and buy price of Put.

If you have not squared up your position, then NSE will calculate the buy price on the basis of closing price of underlying value. Means buy price of your put will be difference of strike price & closing price of Unitech.

Since you have already sold Put @ 11.10 and it is maximum profit you will get from this transaction. Buy price of put or difference of strike price - closing price of Unitech will be deducted from your sell price to calculate the gain / loss.

Hope, it clears your confusion or you get more confused.

thanks a bunch guys. I more question. how about time decay. will it have any effect on the put value, since its expiry this thursday.

In Options there is "almost" no time value left on expiry day. Just look at the Bid Offer price of Unitech 85 PUT : Buyer at Rs.6 and Seller at Rs.21
It is very tricky to trade Stock option as they are very ill liquid.
Your query has already been answered above.
Also note that you need not wait for NSE to square your position, you can do it yourself if you find the right Price to Buy back your Put Option.