Option Writing - Square off

F&O
1

Dear Sir,

I have a query please help

If I sell a call of HDFC Bank for say 900 strike price quantity 500 and premium 20 rs. for 25 June 2020 expiry.

Let’s say date is 5 June 2020.

I receive the premium of rs 10000

1.What if I square off my position on 20th June with a premium at 15 rs? Can I do that? What will be my liability after that as per contract? If stock price crosses my strike price, do I have to still buy or sell shares or pay to the buyer on expiry date?

Please help…

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2

You can get out of your position anytime you want to and there are no implications.

3

Thanks.

So squaring off means clearing all future liabilities. No losses or risks on expiry even if it will more than strike price.

4

Yes. Closing your position means you are done with it.

5

Yup.

6

Hey, I recommend you to know more about option trading first, options are very risky instruments, this question is very amateurish. You can consider reading varsity options module here.

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7

I had the same question as I thought that as an option seller, you cannot exit until expiry. I did consider reading varsity’s option module but nowhere did I find any mention of any timeline flexibility (except expiry) for exiting a written option. I do know that we can exit anytime as an option buyer, so wondered if it was possible for an option seller too, to exit anytime. Thanks for raising this question @mmr

8

Yes. You can buy sell anytime. Stock option has more risk than index option sell. So please read before taking any action stock options sell.

9

Dear Manish

Thanks for your concern.

As you said stock option has more risk than index. Can you please elaborate?

What if I use cash secured put or covered call. What’s your opinion.

Please guide.

Thanks

10

Possibility of stocks falling/zooming is high. See example of yes bank 300 rs to 30 rs.

That’s why Index (nifty/Bank nifty) are safe .

11

Also, in this example, the premium received will be adjusted to 5 rs. instead of 20 rs., as you squared-off at 15 rs. on 20-Jun (i.e. Rs.20 sell minus Rs.15 square-off)… So premium received will be Rs.5 * 500 quantity = Rs.1000

Correct me if my understanding is wrong here?!

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12

This is right.

13

Another rookie question based on same example, do we need to take any action on the ‘expiry date’?

Is my understanding correct that we square off to book loss or profit before expiry date but if trade goes our way (i.e. spot price is < 900) then we need not take any action and the option expires on the expiry date.

14

Then the option will expire wortless and you will get to keep entire premium recieved.

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