(i) Regarding Call options, if the buyer exercises his right at the expiry, is the mechanics follow like below?
The buyer will buy lot at strike price from the seller and sell at the spot market price in the spot market.
(ii) Regarding Put options, if the buyer exercises his right at the expiry, is the mechanics follow like below?
The buyer will buy lot at spot market price from the spot market and sell at the strike price to the seller.
(iii) Suppose an underlying is trading at Rs. 10/- in spot market. A particular strike price of a call option agreement is Rs. 15/- (Lot size:10) with a premium of Re. 1/- when underlying trading at Rs. 10/- . Price shoot up Rs. 20/- on the expiry day. With view of the above, I have the below queries:
(A) With view of the above example, suppose at the expiry when the underlying price is Rs. 20/-, the premium goes down to Rs. 0.50/-. If the buyer exercises his right then P&L= IV- Premium, as we studied. However, will the change of the premium price i.e, Re. 1/- minus Rs. 0.5/- will also affect the P&L of the buyer at expiry?
(B) If the buyer exercises his right, for the seller we know that P&L= Premium- IV. Will the change of premium ( Premium received minus premium at the expiry) will affect the seller at expiry?
(C) Is there any general trend that follows with the premium price? I mean to say that as the underlying price from Rs. 10/- (OTM/Deep OTM) will move towards the strike price (Rs. 15/-), will premium also increase accordingly? Also, if the underlying price moves above Rs. 15/- (ATM) to Rs. 20/- (ITM/Deep ITM), will premium increases accordingly? Kindly help understand how premium follows from “Deep OTM—->OTM—–>ATM—–>ITM—–>Deep ITM” for CE.