Lets say you have bought call/put options at premium Rs P/-
In the day of the expiry you are profitable from spot price perspective (ITM)
spot price is above breakeven point for long call
spot below breakeven for long PUT
But there are no buyers of the long call/put at expiry day
what I understand is…for the option to be ‘exercised’ on the day of the expiry ITM options when you are unable to square off
the options buyer account should have the purchasing/shorting power of the complete security value
the buyer transfers this money to the seller/writer
the seller as he have an ‘obligation’ he transfers the shares to buyer at the strike price
buyer immediately sell/cover this strike in the open market
of course these are done by the system and the resultant cash differential is reflected
so in a gist,
if ITM
strike above breakeven point
irrespective of premium (as option premium doesn’t appreciates or some times crash on expiry day)
even theres 0 buyers
option will be ‘exercised’ and buyer will be profitable
please correct me where am wrong
Questions:
Do the buyer need the purchasing or shorting power in the account to exercise the option? will margins/leverage come into play or this is treated as delivery?
as breakeven point is calculated using the paid premium, option premium on expiry is irrelevant for calculating PnL?
Until now most stock options were cash settled, index options will always be cash settled. What this means is that on exercise, the buyer doesn’t have to bring in any more money or security. Whatever is the actual price of the underlying, adjusted to that option is settled.
But SEBI has now mandated that all stock options have to be compulsorily delivered on exercise. So what this will mean is that if you are holding long calls, you will be forced to take delivery of the underlying stock, and similarly on long puts give delivery of the underlying stocks.
Until now no. But most brokers on contracts which are compulsory delivery have already started this. You can check out our policy here :
For the options trade, the P&L will be the exercised price. But there will be a separate delivery trade associated with every exercised option trade (if option physically settled).
In case of index options, everything remains the way it was before.
@nithin thanks Nithin (aka desi mark cuban as I picture him), for even despite of huge success and status. relentlessly answers queries in this forum for experts and newbs alike.
as Karthik Rangappa explains in zerodha varsity, the split of reliance was one reason of the surge in liquidity, I believe that zerodha has also contributed to the same cause and bought a huge retail participation to the rather grim indian retail market.
not sure if the account is shared I am guessing not, based on the to the clarity of reply, but irrelevant even so and thanks nithin and team!