How Option writing is unlimited loss & Limited profit?
Let take the below example.
Person A: Sold option contract @ 10Rs
Person B: Buy Option contract @ 10Rs he closed position @ 12 with a profit of Rs 2
Person C: Buy the option contract from person B Rs 12 (Which includes premium) then he closed the position @ 10 with loss of 2.
This will continue so on so forth until the option seller closed the position.
In the above example, the option seller loss was only 2 Rs…
Person A got the profit 2 from Person B and Person B closed the position with loss of 2
Kindly clarify my understand is correct?
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You can read this module on Varsity for better understanding.
You got the whole point wrong. From what i can see, I think you are asking about flipping premiums by short selling the contracts. When the person A sold the option contract his profit was limited @ Rs 10 the premium he received and since there’s no cap as to how much the premium can increase there’s unlimited loss as A has to buy back the contracts eventually.
in case of Person B, since he is an option buyer his loss is only limited to the premium he paid and the premium has no cap as to how much it can increase hence, it has unlimited profit potential.
Person A has to buy back the contracts so let’s say when Person A sold the contract @ Rs 10 and turns out the premium increases to Rs 15, now Person A will have to shell out extra Rs 5 to buy back the contract. Let’s say the contract premium increases to Rs 50. A will have to shell out extra Rs 40 in order to buy back the shares and close his short position. So you see the loss is unlimited here.
Still not clear? Learn more here: https://zerodha.com/z-connect/queries/stock-and-fo-queries/basics-on-options-shortingwriting
Futures buying or selling both is unlimited loss & unlimited profits.
Have you seen such case? ever?
Same with options
Unlimited loss means if you sell a 11100 put for 10 rs and 6 pm in the evening you heard the news that nuclear war has happened. Next morning market opened at 100. Now you will have to pay (11100-100+10)*75 to the buyer.
But had you sold the 11500 call for rs 10, even though market opens at 100, you will still get 10 rs only.
Hence unlimited losses and limited profits.
Options buyer can loose 10 rs only, but gains unlimited.
I know about options but I haven’t gotten much into futures. Which in your opinion is most profitable?
each is different. And have own pro and cons.
Options are more complex than futures and hence reward is more if properly handled.
In option buying you can do pyramiding, delta hedging, gamma scalping etc.
In option selling you can do delta hedging, adjustments and time value works for you.
What do you do? Do you scalp or day trade or swing trade or your style is completely different?
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Mix of everything.
Multiple strategies.
Option selling follow Jegan.
For option buying follow Madan Kumar