thanks gsalvadi .
an example would be of much help to me.
I wrote 3300 ce @3.6 ...now if i leave it untouched till expiry what will happen.
By writing the option at 3.60 you get 3.60 X Lotsize. This is your profit.
You have to leave it untouched because, you can not touch it
The option buyer can leave it untouched. You said CE, it means call option European type. European type options are options that can not be exercised before expiry.
Though the option you wrote changes hands, it would automatically exercised at the time of expiry.
On expiry, in case of a call option, your obligation is to pay the buyer (3300-Spot Close on expiry) * Lot Size, if the spot is close at 3500 then you are obliged to pay (3500-3300)* 50 (lot size) = 1,00,000/-
In case of put option you need not pay anything as the Spot closed above the strike rate.
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Say one is bullish, he writes put options or buy call options
If one is bearish, he writes call options or buy put options
So both bulls and bears can write / buy options at appropriate strike prices as per their prediction.
Option gives option to the buyer not to the writer
What is that option the buyer gets?
If a bull buys a call option, strike 3300 Nifty on expiry, if Nifty closes above 3300, he gets the difference multiplied by lot size as his profit.
If a bear buys a put option, strike 3300 Nifty on expiry, if Nifty closes below 3300, he gets the difference multiplied by lot size as his profit.
In both cases, the buyer's loss is limited to the premium he paid.
For the writer, the profit is the premium he receives on writing an option and potential loss is based of Spot close and could be any sum.
So, it is not advisable to write naked options. If you write, you have to buy options that would offset your loss. That is what people here say a "covering"
An option survives till the expiry. Why we call one an option writer instead of option seller. Because, an option writer is one who initiates the option. If the buyer of the option who bought the option @ 3.60 may decide to sell it for 5.40, a higher premium. In this case this person is a seller.
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Options are used for hedging and speculation.
Hedging: If you have bought some equities and you fear your portfolio value may go down if the market goes down. So you buy put options.
If the market closes below your strike price, you get profit from options which would compensate the loss in your portfolio.
Speculation: If you are bullish, buy calls or write puts, if you are bearish buy puts and write calls
Simple example of
Bull Spread: Buy a call and write another call at different strike prices. Buy a call with strike price below the current index level. Write a call with a strike price above the current index level. This bull spread limits both upside profit and downside risk.
Try yourself working out a
Bear Spread
I hope this would help.
Never understand options with some simple, arbitrary logic. Complex spreads could boil ones head. And naked options are not safe.
