Hi All,
I am new to Options and have a few questions regarding the same.
I have a query regarding a specific trade I carried out this month.
I wrote ASHOKLEY19FEB87.5CE at Rs 2.1 on 5th Feb receiving a premium of Rs 8400(2.1 * 4000).
My assumption is as long as the price of ASHOKLEY19FEB87.5CE is below 2.1 * 2 = 4.2, i’ll always be in profit because, when I write options I would have got Rs 2.1 as premium credited to my account.
So I exited the position on 8th Feb at Rs 3.4, I assumed my net profit for the trade would be 4.2- 3.4 = Rs 0.8 , i.e 0.8*4000 = Rs 3200
My idea for exiting was on the same day i,e 8th Feb ASHOKLEY19FEB92.5CE was trading at Rs 1.65, so if I sell this option and hold it till expiry and assuming ASHOKLEY price is below Rs 87, i would have made
Rs 1.65 + Rs 0.8(from earlier trade) = Rs 2.45, whereas if i kept ASHOKLEY19FEB87.5CE till expiry assuming
ASHOKLEY is trading below Rs 87.5 on expiry i would have made only Rs 2.1.
1)Is my understanding correct w.r.t Options premium?
2)Should I have waited till expiry instead of getting into a new trade?
If you write options, to gain maximum profit you have to wait till expiry provided that the strike price must end-up out of the money. If you exit anytime before expiry you are essentially buying it back so you pay the premium for the same. When exiting before expiry, you will profit if the current premium is less than when you wrote the options and you will be at loss if the premium is higher than when you wrote it.
@aravindvlad I was always under the assumption that we will receive amount to our trading on the day we sell option say in this case, it is Rs 2.1, and when we exit the position at Rs 3.4, diff 3.4 - 2.1 = Rs 1.3, which i can give it from the Rs 2.1 which I received as premium earlier leaving me with Rs 0.8 from the original premium.
But, as per your comment we should consider option selling as just another stock trading, wherein End of the day, it is only sell price - buy price is the profit/loss.
@newbie2 Yes options trading for premium works just like stocks. In you case, when you write options at Rs 2.1 you receive premium. It is credited in your trading account. If you exit the position when premium is Rs 3.4, you are liable to pay the entire Rs 3.4 as it is essentially buying it back. So Rs 3.4 will be debited from your account. In this process you have lost Rs. 1.3. On the other hand, if you have bought @ 2.1 and exited at Rs 3.4 then you have made a profit of Rs 1.3.
Note: You will also have other charges like brokerage, taxes.
Thanks @aravindvlad. My doubts are cleared with the following sentence If you exit the position when premium is Rs 3.4, you are liable to pay the entire Rs 3.4 as it is essentially buying it back. So Rs 3.4 will be debited from your account. In this process you have lost Rs. 1.3.
Note: You will also have other charges like brokerage, taxes. True, will consider this. Thanks again
. My doubts are cleared with the following sentence