Naked Puts and Covered Calls

#1
Hello,

I am planning to use ICICIDIRECT for options. Have a couple of questions.

1. Naked Puts:

Lets say a stock is trading Rs.100. I want to buy the stock if it goes to Rs.80.
So I sell a naked put option of that stock of strike price Rs.80.

My question is if the stock goes below Rs.80 below before expiration and someone exercises the Put option which I sold then would ICICI automatically buy the stock using the cash in my account for Rs.80? Or would they square off my position before the expiration and assign me a loss for the trade?

2. Covered Call:

Lets say I have shares of company ABC which is trading at Rs.100. I want to sell a covered call of the ABC stock (strike price Rs.120). If the stock goes up above Rs.120 before expiration, would ICICI sell the shares in my demat for Rs.120 and credit me the amount for the shares sold?

Basically the question is...in ICICI or any other Option Broker, is there a link between the share in demat account and the covered call sold....OR do they treat them independently?

3.Who are bestbrokers for Options Trading other than ICICIDIRECT.

Thanks.
 

NOMINDTR

Well-Known Member
#2
Hello,

I want to buy the stock if it goes to Rs.80.
So I sell a naked put option of that stock of strike price Rs.80.
What do you mean buy "selling" a squaring off?
An option seller is different from option writer
 

Capricorn

Well-Known Member
#3
Hello,

I am planning to use ICICIDIRECT for options. Have a couple of questions.

1. Naked Puts:

Lets say a stock is trading Rs.100. I want to buy the stock if it goes to Rs.80.
So I sell a naked put option of that stock of strike price Rs.80.

My question is if the stock goes below Rs.80 below before expiration and someone exercises the Put option which I sold then would ICICI automatically buy the stock using the cash in my account for Rs.80? Or would they square off my position before the expiration and assign me a loss for the trade?

2. Covered Call:

Lets say I have shares of company ABC which is trading at Rs.100. I want to sell a covered call of the ABC stock (strike price Rs.120). If the stock goes up above Rs.120 before expiration, would ICICI sell the shares in my demat for Rs.120 and credit me the amount for the shares sold?

Basically the question is...in ICICI or any other Option Broker, is there a link between the share in demat account and the covered call sold....OR do they treat them independently?

3.Who are bestbrokers for Options Trading other than ICICIDIRECT.

Thanks.
The answer to your questions are NO. NO broker buys or sells shares for you since,
Options are cash settled you have to pay the difference (cash) on exercise/assignment.
There are no option friendly brokers I am aware of in India. Most don't even understand options/strategies.

Cheers.
 
#4
Hello,

I am planning to use ICICIDIRECT for options. Have a couple of questions.

1. Naked Puts:

Lets say a stock is trading Rs.100. I want to buy the stock if it goes to Rs.80.
So I sell a naked put option of that stock of strike price Rs.80.

My question is if the stock goes below Rs.80 below before expiration and someone exercises the Put option which I sold then would ICICI automatically buy the stock using the cash in my account for Rs.80? Or would they square off my position before the expiration and assign me a loss for the trade?

2. Covered Call:

Lets say I have shares of company ABC which is trading at Rs.100. I want to sell a covered call of the ABC stock (strike price Rs.120). If the stock goes up above Rs.120 before expiration, would ICICI sell the shares in my demat for Rs.120 and credit me the amount for the shares sold?

Basically the question is...in ICICI or any other Option Broker, is there a link between the share in demat account and the covered call sold....OR do they treat them independently?

3.Who are bestbrokers for Options Trading other than ICICIDIRECT.

Thanks.
1. No, ICICI or any other broker will only "take cash away, which is the difference of strike - current market price"; 80-current market price (say 75) 80-75 = 5rs * lot size will be deducted on exercise or on expiry when CMP < 80.

2. If your account does not have the "Cash margin", then brokers will initiate "margin call" (pay the cash) or they'll sell the holdings to recover the margin money (at the end of day) as F&O settles T+1. Since you've sold 120 strike, which means you've got 20rs profit space. You will not get the margin call till the price reaches 120+premium say 5rs, till 125, your holdings are safe.
 

Sunil

Well-Known Member
#5
Hello,

I am planning to use ICICIDIRECT for options. Have a couple of questions.

1. Naked Puts:

Lets say a stock is trading Rs.100. I want to buy the stock if it goes to Rs.80.
So I sell a naked put option of that stock of strike price Rs.80.

My question is if the stock goes below Rs.80 below before expiration and someone exercises the Put option which I sold then would ICICI automatically buy the stock using the cash in my account for Rs.80? Or would they square off my position before the expiration and assign me a loss for the trade?

2. Covered Call:

Lets say I have shares of company ABC which is trading at Rs.100. I want to sell a covered call of the ABC stock (strike price Rs.120). If the stock goes up above Rs.120 before expiration, would ICICI sell the shares in my demat for Rs.120 and credit me the amount for the shares sold?

Basically the question is...in ICICI or any other Option Broker, is there a link between the share in demat account and the covered call sold....OR do they treat them independently?

3.Who are bestbrokers for Options Trading other than ICICIDIRECT.

Thanks.
First of all, don't interlink stocks lying in your demat account with Futures & options scrips....
If you are having XYZ stock in your demat account, you may use Options as hedging instruments - but in no way, their value will be netted by your broker.... or in other words, the value or trading of options will not affect the physical shares lying in your demat account in any way.

1. "Selling a naked put option" means "writing a put option" means you are expecting the price won't fall below the strike price of such put.
If you write Put 80 of a stock with price 100 (at the time of put writing) and later, when price of stock falls below 80, then the buyer of the stock option can exercise this contract anyday before settlement (as stocks in India have American style of settlement). Let's assume you sold/wrote the Put 80 @ Rs. 5/-. Any broker would credit your account with Rs 80*lot size, and such an amount would be subject to MTM adjustment at end of every trading session (since you are the writer of the option).
In case the buyer of your Put actually exercises his right, when stock's closing price is Rs 75 and the Put 80 is valued at around 20/- then ANY broker would just square off your position fully and the net debits (MTM adjustments) would be your total loss and should be equal to (5-20) = -15*lot size
There is no question of broker buying physical stock for you, etc as Options in India are cash-settled and not physically settled.

2. Answer is a combination of both in my intro para and answer 1.

Hedging using Options is like buying life insurance for yourself. Prima-facie, everyone will die one day, but one has more hope of living than dying in very near short term...
hence, if one says that he's paying life insurance premium, he does not mean he's gonna die soon.

Basically the question is...in ICICI or any other Option Broker, is there a link between the share in demat account and the covered call sold....OR do they treat them independently?
THEY ARE TREATED INDEPENDENTLY BY ANY BROKER IN INDIA.

3. After a recent SEBi directive regarding brokerage charges, most brokers have a fixed amount per lot (be it ANY scrip with ANY lot size) IN CASE OF OPTIONS ONLY.
So, if you are regular Options dealer, go with that brokerage house which charges you such least flat charge. I use & prefer Religare.
 
#6
1. "Selling a naked put option" means "writing a put option" means you are expecting the price won't fall below the strike price of such put.
If you write Put 80 of a stock with price 100 (at the time of put writing) and later, when price of stock falls below 80, then the buyer of the stock option can exercise this contract anyday before settlement (as stocks in India have American style of settlement). Let's assume you sold/wrote the Put 80 @ Rs. 5/-. Any broker would credit your account with Rs 80*lot size, and such an amount would be subject to MTM adjustment at end of every trading session (since you are the writer of the option).
In case the buyer of your Put actually exercises his right, when stock's closing price is Rs 75 and the Put 80 is valued at around 20/- then ANY broker would just square off your position fully and the net debits (MTM adjustments) would be your total loss and should be equal to (5-20) = -15*lot size

Sir
got a doubt,
if i write a put , will I not be having the freedom to sell at any time i want ...:confused:
 

NOMINDTR

Well-Known Member
#7
Sir
got a doubt,
if i write a put , will I not be having the freedom to sell at any time i want ...:confused:
Writing a put is nothing but "selling a put" your profit is limited to the premium you receive and profits are unlimited, provided you do not have spreads.

Hold your horses. People believe option trading is the easiest thing on earth, the truth is in contradiction. If you are interested, spend great deal of time in learning options
 
Last edited:

NOMINDTR

Well-Known Member
#8
First of all, don't interlink stocks lying in your demat account with Futures & options scrips....
If you are having XYZ stock in your demat account, you may use Options as hedging instruments - but in no way, their value will be netted by your broker.... or in other words, the value or trading of options will not affect the physical shares lying in your demat account in any way.

1. "Selling a naked put option" means "writing a put option" means you are expecting the price won't fall below the strike price of such put.
If you write Put 80 of a stock with price 100 (at the time of put writing) and later, when price of stock falls below 80, then the buyer of the stock option can exercise this contract anyday before settlement (as stocks in India have American style of settlement). Let's assume you sold/wrote the Put 80 @ Rs. 5/-. Any broker would credit your account with Rs 80*lot size, and such an amount would be subject to MTM adjustment at end of every trading session (since you are the writer of the option).
In case the buyer of your Put actually exercises his right, when stock's closing price is Rs 75 and the Put 80 is valued at around 20/- then ANY broker would just square off your position fully and the net debits (MTM adjustments) would be your total loss and should be equal to (5-20) = -15*lot size
There is no question of broker buying physical stock for you, etc as Options in India are cash-settled and not physically settled.

2. Answer is a combination of both in my intro para and answer 1.

Hedging using Options is like buying life insurance for yourself. Prima-facie, everyone will die one day, but one has more hope of living than dying in very near short term...
hence, if one says that he's paying life insurance premium, he does not mean he's gonna die soon.



THEY ARE TREATED INDEPENDENTLY BY ANY BROKER IN INDIA.

3. After a recent SEBi directive regarding brokerage charges, most brokers have a fixed amount per lot (be it ANY scrip with ANY lot size) IN CASE OF OPTIONS ONLY.
So, if you are regular Options dealer, go with that brokerage house which charges you such least flat charge. I use & prefer Religare.
I wonder why people jump into trading before they understand what is what!! And pathetically, most the brokers don't know what is an option itself. In effect an ignorant trader has the option for limited loss and unlimited profits, which he never enjoys. I have seen many people who does not know option writing, an Exercise, what are American and European, spreads etc., They just think options are instruments that could be bought and sold
 
#9
Writing a put is nothing but "selling a put" your loss is profit limited to the premium you receive and profits are unlimited, provided you do not have spreads.

Hold your horses. People believe option trading is the easiest thing on earth, the truth is in contradiction. If you are interested, spend great deal of time in learning options
sorry ...my mistake
all I wanted to ask is if i write a put , will I not be having the freedom to COVER at any time i want ..
 

AW10

Well-Known Member
#10
sorry ...my mistake
all I wanted to ask is if i write a put , will I not be having the freedom to COVER at any time i want ..
Yes, you can cover the written put by buying it back at anytime.
But as a writer, you have taken an obligation.. so if your put gets in the money and the other party (i.e. put buyer) excercises their right and exchange assign it to you, then you have no other choice but to respect your obligation. (you can call this as forced square-off by exchange).

Thats why, as a option seller, it become important to monitor the position specially when it gets ITM.

Happy Trading.
 

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