A very basic question on option selling (writing)

#1
Hi! I'm a beginner trader in Nifty Futures and would like to get into Option Selling on Nifty Options. In that context, I have a few questions on Option Selling!

How does Option Selling work?

I know that to sell a Nifty option, I have to have a combined span and exposure margin of around Rs 25,000 which is the same as the margin required to open a position on the Nifty Futures contract. But how does the mark-to-market thing work?? It's here that I have difficulty understanding Option Selling, as compared to Futures buying or selling.

For example I am bearish on market and want to SELL 1 lot of Nifty 6300 CE which has a premium of Rs 70. So, does the premium value of Rs 3500(= Rs 70*50) get credited to my account? If yes, then tomorrow, if the CE loses value and comes down to Rs 60, I should have a profit of Rs 500 (=Rs 10*50). How does this profit come into my account? In Futures, Rs 500 would be deposited into my account, as part of the mark-to-market. But how does it work in this case since the premium of Rs 3500 is already deposited into my account?? And if my prediction goes wrong and the CE goes up to Rs 80, I have a loss of Rs 500, then how does this loss get reflected? Is Rs 500 debited from my account??

And if after holding for a few days, the CE has a value of Rs 40 and I place a BUY order and close the position, then how do I get the profit of Rs 1500?? Is Rs 2000 debited from my account (that is from the deposited premium of Rs 3500) and I am left with Rs 1500 as my profit??

Can someone please explain? Thanks in advance!
 
#2
If you sell Options, all of the premium gets credited to your account. When you buy back the option, amount equivalent to premium X lot size will get deducted from your account. There is no daily MTM adjustment in Options.
 
#3
Thanks for your reply!

I asked my broker and he said something about mark-to-market on daily basis! That's why I asked this question!

Is there really no MTM thing for Option Selling???
 
#4
I think there is M2M losses . If your call goes to 60 from 70 , 500 will get added to your account .

Say day 1 close - 70 -> Nothing happens Except 25k blocked
day 2 close 60 -> 500 will get added
day 3 close 65 -> 250 will be debited
day 4 close 80 -> 750 will be debited

M2M losses/Profit will be booked on closing price.

Some one please correct me if I am wrong
 

Novice30

Active Member
#5
Thanks for your reply!

I asked my broker and he said something about mark-to-market on daily basis! That's why I asked this question!

Is there really no MTM thing for Option Selling???
The M2M on your sold options gets reflected in your margin.

If your sold options are in loss, your margin will increase. If your sold options are in profit, then only the margin that meets the minimum criteria of your broker will be maintained.

All brokers have different criteria in determining margins.
 

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