Option basics question on settlement

Hi All, I am newbie to Options trading.
Let me quote an example.

Date 6th Feb 2015

This is my first trading in Options so may be I am not using Options terminology very strongly.

I have purchase CAIRN Call Buy Options (Expiry Feb26) 1 lot at Strike Price of 265 and premium paid 3.85.
I wanted to understand the settlement process better since this is my first option trading.

1. Let's say by Feb 20, the premium of this contract increases to 5.85, and I am squaring off this trade. so will I make profit of 1000 * (difference of premium)=1000*2=2000? is this right understanding?

2. on feb 20, say the spot price of cairn becomes 270. In that case should I be watching on what is the premium at that moment? Say spot price is 270 and premium is 6.85. so there can be two way to look into
a) square off which means 1000 * (6.85-3.85) = 3000
b) sell the contract which means 1000 (spot - strike - premium paid)=1000 *(270-265-3.85)=1000*1.15=1150

if the price moves to 270 will I have an option to pick any of the alternative a or b mentioned above? I am using ICICdirect and I am only seeing the option to Sqaure off and not seeing sell option?. is it because the spot price has not crossed striker price? once it crosses 265 will I see two links in my demat account?

3) if by squaring off and selling the contract gives the same profit, which one should be preferred and what should be considered while taking the decision?

4) How is brokerage considered in terms of squaring off and selling? I am using ICICIdirect

5) What will happen if I let me contract expire without myself doing anything till the expiry date? will it sqaured off or will it be sold? I have read in few articles that it depends what customer has informed to brokers. what does ICICI does? Do I need to call and inform ICICI in advance?

I know it is much basics for you all gurus, I have read couple of articles and videos but was not able to find full answers to my questions. Thank you for responding.

Thank you,
Ashish

Yes.

yes.

Until Expiration it is purely premium play. You paid 3.85 and you are selling it for 6.85. Plain and simple. Spot, Strike comes into play on expiration.


you are confused with selling and squaring off. squaring off triggers the same sell order that "sell order" does. Think like this :
what did you do to buy the cairn option?
ans - placed a buy order.
What should you do if you decide to book profit/loss?
ans - place a sell order.
don't get into square off - sometimes it may be executed at market price.

again. its just an opposite order of your original position. Please learn more about order types.


If you let your LONG option expiry IN THE MONEY this will be settled automatically in cash depending on the SPOT price closing. But, remember LONG options that expiry IN THE MONEY will attract huge STT.
the articles you have read are to deal with american exchanges which have American type as well as European option. In India, options are cash settled.

invest some time in learning about
option types - particularly NSE specific - download NCFM course.
learn about your broker platform - order types.
there may have been a reason for you to take the long on cairn (perhaps it looks oversold and due for bounce back); but the strike you chose is OTM (out of the money), also take time to learn about delta, and other greeks if possible.

and lastly, don't be overwhelmed by option terminologies, the more time you invest in studying, the more you'll become a better trader.

all the best.

Thank you,
Ashish[/QUOTE]

Thank you very much for the detailed response. Helps very much. Just another follow up question (this might not be a logical sceanrio though).

Say I have not sold my position till expiry, and on the day of expiry it is OUT of MONEY. So it will not be automatically settled in cash. Am I right?
Now if the stock is OUT of Money and the premium on the expiry day is 1 Rupee. Does it mean the exchange will automatically does the sell for 1000 * (1-3.85) thereby reducing my loss to 2850? Does it work in this way or not?

I am googling through many videos and articles for learning. I will definitely look forward in NCFM course. Thanks once again.

Rgds,
Ashish

All out of money expire worthless or at 0 rupees. If it expires in the money. Please note you ve to pay STT of 0.125% of the turnover. eg nifty 8000 *25 1 lot STT = 300 Rs in addition to all taxes. Plus anyway ICICI directs very high brokerage charges.

Pls read through broker section to know how u can save lot of money thru discount brokers and many other articles before u start putting in money.

Tarush, you mentioned that exercising an option comes into picture only on expiration date..
While going thru ICICI help section it is mentioned that "All Stock Options are American in nature" and "All Index Options are European in nature."
does it not mean that if stocks are american in nature I can exercise them anytime on or before expiry if it is IN the money? I have purchased CAIRN which is stock options..Am I missing anything?
Please let me know.

Not sure how old the help section is in icici...but here is a screenshot from NSE:



let me know if you find any stock option with CA/PA (american) on the NSE website.

AND please understand that exercising an option (assuming you have a american style option) means that you are buying the stock which is cain for 265 equavalent to 1 lot. you have to pay up 1000 x 265.

Thanks Tarush. Looks like the help is older in ICICdirect. The contract purchased is CE.