Confusion with Expiry Settlement !!

spiritunit

Well-Known Member
#1
Some seniors can clear my doubts here... This example I got from NSE site.. (with mild alterations for current prices)

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Example
Mr. XYZ is bullish on Nifty on 11th August, when the Nifty is at 4471. He buys a call option with a strike price of Rs.4600 at a premium of Rs. 88, expiring on 27th August. If the Nifty goes above 4688, Mr. XYZ will make a net profit (after deducting the premium) on exercising the option. In case the Nifty stays at or falls below 4600, he can forego the option (it will expire worthless) with a maximum loss of the premium.

The payoff schedule
On expiry
Nifty closes at ---- Net Payoff from Call Option (Rs.)
4100.00..................... -88
4300.00..................... -88
4500.00..................... -88
4688.00..................... 0
4700.00..................... 12
4900.00..................... 212
5100.00.....................412
5300.00.....................612
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My doubt is, If I buy a call option with the strike price 4900 for premium Rs.40 on 11th august and on expiry the nifty closes on 4688, so per above example the settlement for me will be 4900 - Rs.212 (1 lot total profit = Rs.10600) is this right?
 

spiritunit

Well-Known Member
#3
Ok, if I have the call option strike price 4400 and the Nifty closes at 4688, as per your statement, the nifty closes above this strike price. what is my profit?
 

trader.trends

Well-Known Member
#4
When you are holding call options:
Profit = Closing Price- Strike Price - Option premium paid. If the closing price is above strike price.
Loss = Premium paid when closing price is below strike price.
When you are holding put options
Profit = Strike price - closing price - Premium paid when closing price is below strike price.
Loss = Premium paid when Closing price is above strike price.

You make profit when you buy call options and the closing price is above your strike price, you make profit in put options when the closing price is below your strike price.
 

spiritunit

Well-Known Member
#5
That's great! Another one, on 27th August 2009 Expiry date, Nifty closed on 4688 and that day also trading is on both put and call options. As nifty volatile between 50 points up and down that day, If I buy a call option of 4400 on expiry date and didn't square off to let it for settlement and Nifty closed on 4688, still will I get paid from the strike price? as because we know definitely Nifty won't close below 4500 on that day. Hope you understand and please clarify.

Why should I make trade on 4600 call as I would get paid more on 4500 call upon to expiry at 4688?
 

trader.trends

Well-Known Member
#6
As it comes close to expiry esp on the day of expiry all options will have a premium equal to the spot-strike for. So the 4500 call premiums will be 100 more than the 4600 call options. Check the premium amount on diff strike prices.
 

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