enquiry regarding selling an option(writing the option).

[ivanboesky]

hello all,
this is interesting thread and I am new to options. I have a practical question .
EXAMPLE:- a trader(AMAN1) buys Nifty august 4050 puts @ 60 say 2 contracts of nifty (50+50=100).
question:- 1) at what price will he break even? and start making profit.
2) what will be his maximum profit?
3) what will be his maximum loss ?
4) can he square off his put option any time before expiry
or he will have to wait for the last expiry day?

MARGIN PAID:- 6000 (3000+3000).

thanks and Regards,
Aman1

1. Aman1 starts making money once the Nifty falls below 3990 ie. 4050-60.
2. Maximum profit is achieved when the Nifty falls to 0. So max profit will be Rs. 199500 per lot, or Rs. 399000 for both lots.
3. Maximum loss is limited to premium paid. So Rs. 3000 per lot, for a total of Rs. 6000 for both lots.
4. Position can be squared off at any time till expiry, or will be automatically exercised if in the money on expiry.

 

[Aman1]

Ivan thanks for such a prompt reply. what will happen if nifty falls to say 4100 but not below
it till expiry. loss will occur or option expires worthless? how you arrived at 199000 figure of profit

 

[ivanboesky]

If on expiry day the Nifty falls to 4100, the put will expire worthless and you will lose the entire premium paid. However, if the Nifty falls to 4100 sometime in the near future, the puts will be worth a lot more than Rs. 60. Plus Implied Vols increase during market falls and that should further increase the puts prices. If this occurs, maybe you can square off your put at a profit.

 

[Aman1]

and how is 199500 fig calculated?

 

[ivanboesky]

3990 (max profit if nifty falls to 0) * 50 (nifty lot size) = 199,500

 

[Aman1]

thank you ivan. very informative. would you recomend any book on options.

 

[ivanboesky]

No problem. Try "McMillan on Options" by Larry McMillan for a start. Then go on to "Options as a Strategic Investment" by the same author for a more advanced reading.

 

[srikanth_kandalam]

Hello Aman

1. Your max profit will depend on where Nifty is- since you are presumably bearish, the lower nifty is below 4000- the higher will be the profit. The breakevend depends on transactions cost.

2, When you buy option- the max loss will be the premium paid.

3. You can square of options ( I am assuming this will be an American Style Option)

For option purchase you dont need margins- just the premium and transactions cost.

srikanth

 

[ivanboesky]

Hello Aman

3. You can square of options ( I am assuming this will be an American Style Option)

For option purchase you dont need margins- just the premium and transactions cost.

srikanth

An option (American or European) can be squared off anytime. Whether an option is American or European only determines the possibility of early exercise.

 

[srikanth_kandalam]

Agreed! They differ in the way they are exercised.