Hey, trying to figure out options and just wondering, what happens when you short puts or calls and your position goes against you? While learning options, I read somewhere that “buying" calls or puts is preferred because the most you can lose is your premium and with shorting them, profit is limited and loss is potentially unlimited.
So, just for my knowledge, suppose I shorted a ₹100 put/call, my position went against me and the premium went to ₹300 () what will my broker do in that situation? Will any money that’s in my account be deducted and my account balance go to minus? Or will any money that I owe only be collected from me on expiry? Also, if you don’t mind answering, how exactly will money be collected from me?
Suppose you short a put or call at 100 with lot size 75 and it goes up to 300 your mtm loss would be 200*75. If you close your position at this moment then 15000 will be deducted from your trading account, if there is no money in account then it will go to negative
Hey, thanks for replying. What if I don’t close the position and there is ₹15k present in my account? Will it get auto-deducted from my account even if I haven’t closed my position? Will I not be able to use that ₹15k for placing any other trades? Also, what happens if I don’t have ₹15k to cover the loss at the time of expiry/closing position. How will the broker collect that money from me?
Hmm, sounds complicated to me But, I somewhat get what you’re saying. Basically, the broker will have me deposit more than the trade amount to open the trade. But, what if my position goes against me so badly that it crosses the deposit amount I opened the trade with? Will my trade be auto closed as soon that level is breached or can I keep the position open till expiry? How will the loss be collected from me in that case?
Brokers have RMS team which monitors positions like you said gone horribly wrong ,the rms will square off your losing position if the loss is close to the account balance and ask for maintaining sufficient balance to carry forward the position till expiry
Ah, I see. Thanks for clarifying that. I had a very bad picture of debt collection in my head You said the position will be auto closed by the RMS if it’s near account balance level, BUT, what if my position was fine at market closing yesterday, and the opening today completely destroyed it? The RMS couldn’t have seen a disaster of this proportion coming, what happens in this case?
This often made statement is theoretically wrong for PUT options. Your risk and reward is limited since a stock price cannot go before 0, so a PE option price cannot rise unlimited and infact capped at its Strike price. Example: an SBIN 300 Sep PE can atmost rise to 300 and no more.
An call option premium can theoretically rise infinitely high but practically its a impossible situation.
A common mistake, often a fatal one, a beginner make is that they buy options with a large proportion of their capital and this limited risk eats into their capital.
Selling options requires locking margins (ranging from 60k- 1.4L, which often 10times more than options premium)with brokers . So if options move against you, its managed by this margin.
If move is large, way before you have exhausted your margin, you get a call from your broker asking to deposit more margin. If you do so, you can continue with your position or else the broker squares off your position in the market.