Please help me in Margin V/s Loss V/s Premium Gain

For Example If I buy a call of 5200 at 80 Rs. I am confused with 3 aspects Margin Block, Actual Loss/Profit, Premium Gain.

My questions are:-

1. I have read in forums that when I buy or sell (I don't know) a call with put I gain premium. what is that premium gain and how does it affect profitability ?
2. In the above example if the call goes in my favour 10 points what is my actual profit loss when i close call. please elaborate in detail.
3. In above case my margin requirement is 4000 Rs. If naked call goes against me for 10 point and i close whether my total loss will be 4000 Rs and deducted from my account or 500 Rs (50Lot Sizex10 Point Loss) ?
4. What is the premium gain concept in case of covered call and how does it help me minimize losses in the above case. You can take an example of put along with the above naked call.

Thanks in Advance. Pros please help me. I am still not understanding it clearly.

when you buy a call/put option you pay the premium.

when you sell a call/put option you receive the premium

suppose you bought an call option for 50 Rs premium with a strike price 1000 rs (underlying - be it index or stock) with a lot size of 50

If the price move up by 1 re u have 50 rs which covers the cost of premium you have paid. If the prices moves up further then you stand to gain the additional amount in excess of 1001.

suppose you have bought the stock actually you would have spend an amount of 50000, whereas in case options your broker will stipulate a % of total value to be held as margin. which they retain, in case you are not able to honour your commitment to buy/sell the underlying.

Dear Vijay,

Thank you for replying. I think this does not satisfy my initial query. I forgot to mention that I am talking only about nifty options. Sorry for the same. Please talk in terms of Nifty Options. and your answer does not satisfy my original query in this thread.

Can you please reframe your answer as per my question ?

Thank you once again for your time extended.

I'd suggest that you refer the following:

Code:

http://www.traderji.com/options/40325-doubt-square-off.html

http://www.traderji.com/options/40548-really-basic-doubt-about-options.html

http://www.traderji.com/options/40479-how-calculate-margin-required-nifty-options.html

More importantly, you need to execute your trades practically (not with the intent to profit) to know better.

cheers

For Nifty options the underlying is Nifty (index)
so if you buy a call option, you are buying a right to buy nifty till the date of expiry of the contract at the strike price (let us say 5200 in the example sited by you @ 80 rs premium)
so when you will excercise this option? only when excercising such option is profitable to you. (in this case if the nifty crosses 5201.6 - ( am assuming premium is paid for the lot containing 50 index contracts, i dont trade in them) so let us say index goes down below this price, you wont be excercising your right to buy. so you lose your premium. (80 rs)
in case it goes above this price, let us say it moved to 5301.6 so you stand to gain 100 points per unit) so you will gain a profit of 50*100 rs when you excercise your option.

Similarly for put option, the difference is here your right is to sell

I hope this answers your query, if not pls let me know

Hello Vijay and DesiFXTrader,

I understand your help in this regards, I have read all the threads given by desifxtrader but I am still in confusion It is not that I do not understand options completely. I have traded in Stocks, FX but I am getting confused with Margin and Loss. My simple question is how much I have to pay if the nifty goes 10 points against me in the above example. Also what is the premium gain. I read in many calculations that loss is offset against premium gain. what is that premium gain also please explain.

From whatever I understand options is following:-

1. If I bought 5200 call at 80 my margin requirement is 4000 and I can make profit only if the nifty goes above 5200.
2. If I bought 5200 call at 80 my margin requirement is 4000(80premium*50lotsize) and a 5300 put option at 70 then premium gain is 3500 (70premium*50lotsize). In this case If I close the position as it is without any change in the underlying within seconds then my net loss will be 500 INR. i.e 4000-3500 + broker charges. is it correct ?

If you answer the above things then I think I will be able to understand options someway.

Once again thank you all for extending your valuable time to me.

NIFTY Option 5200 Call bought at Rs.80 premium. Total cost = Rs.80x50[lot size] = Rs4000.00. When premium goes up or down you make/lose money.

Premium of an option swings in relation to the underlying, in this case NIFTY.

Ex. NIFTY goes up x points. Premium of 5200 CALL goes up to Rs.90. You decide to sell your Option [square off]. Your profit = Rs.90x50=4500.
Net profit =4500-4000 [margin payment] = Rs.500.

NIFTY goes down x points. Premium of 5200 CALL goes down to Rs.60. You lose = Rs.60x50=3000.
4000-3000= 1000 loss.

If you bought a CALL you have to square off the CALL for profit or loss. BUYING put will not mean squaring off.
You bought 5200 CALL at 80. Margin Rs.4000. YOU have to sell it ! at profit or loss.

You buy 5300 PUT at 70. Margin Rs.3500. This trade will not square off your CALL option.
Both are two different trades.
Ex. If you buy reliance, you will have to sell Reliance to square off your position. Shorting RNRL will not square off your Reliance trade

Treat the CALL trade as separate and PUT trade as separate.

Options concept is confusing initially, you may try the NCFM course module on derivatives.

Dear Loke,

Thats great explanation ! :thumb:

I understood your first part completely. Now please explain me "Premium Gain" concept in your own words. What is premium Gain and what role it plays in covered call.

Thank you very much. :clap: