Option payoff for seller and buyer

F&O
1

new to options , please clarify below

case1:
call option sold with strike price 16750 with premium 50 rs
with current market price or spot at 16500
at start of monthly expiry and
after 2 days i noticed
spot price increased to 16700 with premium increased to 100 rs
and to avoid losses seller immediately squared off position .
what will be seller profit and loss ?
will the seller retain premium amount as strike price is still otm ? or
will the buyer only loose difference in premium amount?
and
what is the status of buyer incase if seller squared off position before expiry ?
will the buyer loose entire premium paid ? or
seller position carry forwarded to some other seller ?

case 2:
call option bought with strike price 16700 atm with premium 100 rs
with current market price or spot at 16700
at start of monthly expiry and
after 2 days i noticed
spot price decreased to 16600 and premium reduced to 50 rs and
to avoid losses buyer immediately squared off position .
what will be buyer profit and loss ?
will the buyer loose entire premium if squared off b4 expiry ? or
will the buyer only loose difference in premium amount?
and
what is the status of seller incase if buyer squared off position ?
will he get entire premium paid by buyer? or
buyer position carry forwarded to some other buyer ?

2

Hy @Praveen_de

This means Spot is at 16500
Sold at strike price- 16750 (OTM) Premium- Rs 50 (Recieved)

After 2 days-

Spot is at 16700

Buy strike price- 16750 (OTM) premium- Rs 100

If you are referring to Nifty, lot size is 50 qty for 1 lot

Hence, Rs 50 (Sell)- Rs 100 (Buy) = (Rs 50)loss

Rs 50* 50 qty = Rs 2500 loss

Seller will not retain the premium as he has squared of the position and buyer will loose difference in premium amount multiplied into lot size.

Case 2 :

This means Spot is at 16700
Buy at strike price- 16700 (ATM) Premium- Rs 100 (Paid)

After 2 days-

Spot is at 16600

Buy strike price- 16700 (OTM) premium- Rs 50

In case of Nifty, lot size is 50 qty for 1 lot

Hence, Rs 100 (Buy)- Rs 50 (Sell) = (Rs 50)loss

Rs 50* 50 qty = Rs 2500 loss

On the above given scenario since the price has tanked from 100 to 50 he would have made a loss of Rs 50 and not the entire premium paid.

Looks like you are new, you can refer to varsity to learn on options.

3

use opstra website
https://opstra.definedge.com/
It will show payoff.

4

Thankyou so much for reply sir,
I have few doubts from your answer , please clear my doubts

case 1:
Sir , who is making the loss of 2500 here ? to my undstd from your ans it is seller .

Sir but
Breakdown point for the call option seller = Strike Price + Premium Received i.e., 16750 + 50 = 16800 .
so who is taking profits .
as long as the spot price remains at or below the strike price , call option writer makes a profit of premium recieved .
and
for option buyer looses diff in premium multiplied by lot , who is making money here buyer or seller.
why will buyer loose money , he did not squared off position .

case2;

As per varsity , The call option writer experiences a maximum profit to the extent of the premium received as long as the spot price remains at or below the strike price (for a call option)

Breakeven point for the call option buyer = Strike Price + Premium Received .
so if the call option has to be profitable it not only has to move above the strike price but it has to move above the breakeven point.
The buyer experiences a loss as long as the spot price is below the strike price .

SO how to undstd this , please clarify

5

@Praveen_de

Lets try to keep it simple :slight_smile: for now :

You bought an Option at Rs. 100 and sold at Rs. 50 so the difference between your buy price and sell price multiplied into lot size is your loss.

An easy way to calculate P&L can be through Brokerage Calculator

There is a concept of Intrinsic Value ( Spot - Strike Price) and Extrinsic Value(Option Premium-Intrinsic Value).

During volatility premium can go up which can be above intrinsic value where the above mentioned scenario can be applied hence there can be losses.

You can check on this link for more info on intrinsic and Extrinsic Value.

B.E = Strike Price + Premium Paid

Hope this clarifies :slight_smile: :slight_smile:

6

yeh sir , thankyou very much…
i have one more doubt …
what happens to position after buyer or seller squared off , will the transaction or contract be moved to other person who is ready to buy or sell at that price , or will be squared off for both buyer and seller

1 Like
7

Regarding this, you need to take into consideration if the trade is being initiated or if it is being closed, from both the ends. If you understand the concept of open interest, then it will become easier for you to get this point.

If the old buyer is squaring off his position and on the counter side of the trade, an old seller is also squaring off his position, at the same price, then they both will match each other in this trade and as a result, the open interest will get reduced by one unit.