Beginner question on options trading

[hgarus]

I had a question about two scenarios in Options trading: There is probably other threads about this but I have executed a trade and I am a bit worried - Please help me out

Below are details of my question:

A} Scenario A -> First Buy, then sell

B} Scenario B -> First Sell, the buy - Short Selling

SCENARIO B QUESTION - the short selling scenario:

My question upfront is - what is the risk (In rupee terms) I hold when I short sell a Put option - sell a put option that I actually do not own?

For Example -

1} If I short sell 1 lot (1000) PUTs of Tata Motors - for 1 rupee at a strike price of say 300 without actually having bought the put option before hand. Also I have not bought the 1000 actual shares of Tata motors either.

On exp. Date - Will I have to deliver 1000 shares of Tata Motors to the guy who bought my PUT option ?

2} Is "WRITING AN OPTION" same as "SHORT SELLING AN OPTION (SCENARIO B)" ? If it is not - I want to know how to avoid the risk of "WRITING AN OPTION" - I mean I don't want to unknowingly "WRITE" an option - while putting an option trading order in my OnlineTrading Portal

SCENARIO A QUESTION

As I mentioned at the beginning, I have already made a trade - I have done the trade in SCENARIO A manner. I have purchased 1000 Puts (1 lot) of Tata Motors at 1.60 - Strike Price is 290. So total money spent is 1600 rupees.

Now at the exp. date - if I have not squared of my position by then ?

Is it just the 1600 rupees I spent? Or more than that ? I called up the customer care - and this guy spookd me saying if I buy a put option (SCENARIO A trade)- los can b unlimitd, gain only limited. Whereas if i buy a call option (again Scenario A type of trade) los is limitd whereas profit can be unlimitd. Thats what had me worried.

Please let me know about this.

Thank you
Hgarus

 

[DanPickUp]

Why should we help you out?

You take a trade but not even take the time to understand what you do.

Then you take a broker which not even knows what he tells on the phone.

Now tell me just one reason why to help you?

 

[vssoma]

yaar....
sorry to say but....i want to tell not only you but also...all new traders, enter into any trade then you'll learn by yourself then analyze if you found any mistake ok if not just put your question here then you'll get meaningful reply...instead of paying to any tutor or institute to teach (like)TA(but it is not), pay to market any learn by your self, i think this is only the best shortcut to learn.

 

[Smart_trade]

@hgarus,

You seem to be totally clueless about how options are traded and settled. Even your broker's customer service guys are no better.

I will only say that if you have BOUGHT the put, your loss is restricted to the premium paid ie Rs 1600 maximum irrespective of where the market goes. That should give you some mental comfort.

Rest of the questions, you yourself find the answers as there is plenty of information on internet /this forum about options......that will be good learning for you.

Smart_trade

 

[muinali]

kaise kaise logon ko chustmer care me baitha dete hain ye custmer ke liye care nahi unke liye tession hai.......... in expiry settlement if spot price goes below @278.40 you will get benifitted(including brokerage),if say expiry settled underlying close @275
strike price-spot price=intrinsic value
280-275=5
intrisic value+extrinsic value=premium
5+0(after expiry settlement almost zero)=5
5*1000=gross profit
net profit=gross profit-brokerage
calculate it ,read more

if expiry close above your strike say 281 you will loose your paid pemium 1600

 

[hgarus]

Hi Guys,

Thank you for your replies. Like smart_trade said I have some mental peace knowing I will lose only 1600 rupees. I trade mostly in intraday equities. I have been wanting to get into options trading for some time. I have read in internet about the options trading. Finally decided to make an entry. And as you see, I tried to have a learning experience by trading very little amount - 1600 rupees.

I was joyous at entering into Options. I had made a call to customer care to ask about something - and on an impulse, just to confirm my understanding - I asked Customer care about the options(even though I had already read in internet) - Then the customer care fellow freaked me out with this statement

"In Options, if you buy CALL your profit is unlimited and your loss is limited. If you buy PUT, your Loss is Unlimited and your profit is limited"

I freaked out ! Anyway now I feel better after reading the comments here.

Here is my understanding in brief: (Hope I am correct)

Buy a PUT option -> You pay (Premium * Lot size) = PUT PRICE
Now if the underlying value of stock decreases, the market Premium you receive on selling the PUT option you had previously bought, will increase. So when you sell -> (Higher Premium * Lot Size) = Higher return PUT PRICE.

And hence you gain profit.

Please correct me if I am wrong

Thank you
Hgarus

 

[Gaur_Krishna]

Anything you buy, your loss is limited (& gain unlimited) and anything you write, your gain is limited (& loss unlimited) and this is the danglling carrot for many :rofl: my 2 cents ....

Regards,
Gaur_Krishna

Hi Guys,

Thank you for your replies. Like smart_trade said I have some mental peace knowing I will lose only 1600 rupees. I trade mostly in intraday equities. I have been wanting to get into options trading for some time. I have read in internet about the options trading. Finally decided to make an entry. And as you see, I tried to have a learning experience by trading very little amount - 1600 rupees.

I was joyous at entering into Options. I had made a call to customer care to ask about something - and on an impulse, just to confirm my understanding - I asked Customer care about the options(even though I had already read in internet) - Then the customer care fellow freaked me out with this statement

"In Options, if you buy CALL your profit is unlimited and your loss is limited. If you buy PUT, your Loss is Unlimited and your profit is limited"

I freaked out ! Anyway now I feel better after reading the comments here.

Here is my understanding in brief: (Hope I am correct)

Buy a PUT option -> You pay (Premium * Lot size) = PUT PRICE
Now if the underlying value of stock decreases, the market Premium you receive on selling the PUT option you had previously bought, will increase. So when you sell -> (Higher Premium * Lot Size) = Higher return PUT PRICE.

And hence you gain profit.

Please correct me if I am wrong

Thank you
Hgarus