Someone was long Nifty Put 5500 at Rs.110, and, when Nifty was around 4500-4600 he could only get a price of 346 to sell, and, he asked me whether its ok to sell at that price, as he was expecting the market to go up. I was surprised to see that he has no knowledge about the value of the option that he was holding, and understandably not the strategies that he can take. The intrinsic value of the option is Rs.900-1000 when Nifty is between 4600 - 4500 (respectively in that order).
Since it is very deep in the money, he probably may not find a buyer, and, he cannot exercise his option as index options are European type. (Stock options can be exercised and you can get the intrinsic value of the option with respect to the closing price of the underlying.)
Some strategies that can be done with a Long Nifty PUT 5500, when it is not possible to sell it in the market at more than its intrinsic value :
1. Buy Nifty Futures - Profit will be 5500-Nifty Future purchase price (4500-4600) levs, and, could be 1000-900 (respectively). Margin is required for buying Nifty Futures. In this case, his profits are guaranteed no matter where Nifty closes.
2. Buy a Call at say 4500-4600 strike rates, at about 190 - 130 (prices at that time). Profit will be 5500 - (4500+190) = 810, or 5500 - (4600+130) = 770 in the worst case. In the first, 190 is to be invested, and, second case, 130 is to be invested. If Nifty goes below the strike at the call is bought, more profits possible. This can be extended further for other strikes as well.
Likewise, there are ways by which these can be countered. My advice would be to read up on OPTIONS before putting your money in there.
Since it is very deep in the money, he probably may not find a buyer, and, he cannot exercise his option as index options are European type. (Stock options can be exercised and you can get the intrinsic value of the option with respect to the closing price of the underlying.)
Some strategies that can be done with a Long Nifty PUT 5500, when it is not possible to sell it in the market at more than its intrinsic value :
1. Buy Nifty Futures - Profit will be 5500-Nifty Future purchase price (4500-4600) levs, and, could be 1000-900 (respectively). Margin is required for buying Nifty Futures. In this case, his profits are guaranteed no matter where Nifty closes.
2. Buy a Call at say 4500-4600 strike rates, at about 190 - 130 (prices at that time). Profit will be 5500 - (4500+190) = 810, or 5500 - (4600+130) = 770 in the worst case. In the first, 190 is to be invested, and, second case, 130 is to be invested. If Nifty goes below the strike at the call is bought, more profits possible. This can be extended further for other strikes as well.
Likewise, there are ways by which these can be countered. My advice would be to read up on OPTIONS before putting your money in there.