Option expiry for nifty december 2018 series ? can anyone help to understand STT trap?

F&O
21

@ksksat, @siva

What will happen if Deep ITM option exercised due to liquidity problem?

E.g. -
Suppose I buy deep ITM Call option of March expiry of a Stock which is not in the physical delivery list (say Ashok Leyland or Yes Bank). Current stock price is 85 and DITM option Strick Price is 65. Are all the below points correct, considering stock price will go up till 95.

  1. Call option premium will also increase to around 30 (95 - 65) considering stock closed at 95 on expiry and DITM Strick Price Delta above 0.9.

  2. STT will be on the entire contract value.
    (4000 + 65) * 30 * 0.125 = 15,243/-

  3. Profit will be Lot Size * (Current Premium - Premium Paid) - STT i.e. 4000 * (30 - 15) - 15243 = 44,757/-

Thanks.

22

Yes, all of the above are correct.

23

@AtD it is true that we will end up in profit in deep itm options even if exercised.

But nithin demonstrated in one of my questions why squaring off will yield same or better profit

Secondly u say liquidity problem. For march as u approach the march end that contract will always have good liquidity and OI. So we need not let it expire

24

@siva and @ksksat Thanks for the reply.

Yes, right. Here we have to pay 0.05% STT.

What is more benefical/recommended in such strategies; One should buy near month expiry (Mar) or far month (Apr)?

Thanks.

25

@atd if u take far month options we will have to pay higher premulium because time value will be more.

Option premium = intrinsic value + time value

Now if open interest is not built on say may expiry it depends on option writer and buyer negotiation as well.

Buying same month expiry at the start of the month is ideal.

Having said that as election is on may some will buy deep OTM puts like 9900 just like a lottery ticket.
But one must understand the spent premium may never come back.

26

Thanks @ksksat

So better is to buy far deep ITM contracts of same or next month.

Also, ITM contracts have only Intrinsic Value and one should not be worried about time decay.

27

No sir let me clarify

Time value and decay applies to both otm and itm

In case of otm the intrinsic value is zero

Buying ITM means u buy a bet that is already won and hope to see it a better winner. Premium paid to buy ITMs will be more compared to OTMs

Buying OTM is a typical thing as u are betting on a possible candidate to cross ur strike price.

28

:+1::+1:
Thank you.

29

@ksksat, IS the below understanding correct considering ITM Call and Put writing.

Suppose current Nifty spot price is at 11700. Will the below strategy work considering different market conditions/possibilities.

Sell one lot of Nifty 11500CE at the premium of 250. Sell one lot of Nifty 12000PE at the premium of 260 of the same month on the expiry day with the fixed Stop Los i.e. 30 points.

1) Nifty closes at 11800.

  • Call option SL will hit and loss will be 30 points (250 - 280).
  • Put option premium and Intrinsic value also comes down and will get the profit of 70 i.e. (260 - [260-100] - 30 Call option premium).

2) Nifty closes at 11600.

  • Put option SL will hit and loss will be 30 points (260 - 290).
  • Call option premium and Intrinsic value also comes down and will get the profit of 60 i.e. (250 - [260-100] - 30 Put option premium)

3) Nifty remains range bound and closes at 11730.

  • Call premium will increase by 15 (considering Delta is less than 0.6) points and loss will be 15 (250 - 265).

  • Put option premium and Intrinsic value also comes down and will get the profit of 0 i.e. (260 - [260-15] - 15 Call option premium).

    OR

  • Call premium will increase and trigger the Stop Loss.

  • Put option premium and Intrinsic value also comes down to 15 but final calculation will be loss i.e. loss of 15 i.e. (260 - [260-15] - 30 Call option premium).

4) Nifty remains range bound and closes at 11705 or 11695.

  • Stop Loss will not be triggered and final calculation will be in profit considering the LTP and buy premium.

5) Or will it better to sell DITM of Call and Put to get the benefit of Delta?

Thanks.

30

@AtD i did not read fully

U have selected 11500 to 12000 range

U are writing call option at 11500 and put option writing at 12000

If nifty ends between 11500 to 12000 u have lost the bet in both call and put scenarios right?

If nifty closes at 11800 u have to settle 11800-11500 x75 to option buyer.it is a loss even after adjustment of meagre premium.

Similar way u betted that nifty will not go below 12000 and u lost that bet as nifty closed at 11800. Again loss.

Read about Florida option writer loss naked option natural gas. Google i

Never write options sir unless u work for trading firm or u are seasoned trader

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@ksksat Thanks.