Please help in calculating profit/Loss in option writing


#1

I’m a newbie to trading and currently learning options and futures. Although it seems obvious I get confused in calculating profit or loss. Assume the following trade and please help me with calculation.

  1. Sell 1 Lot of ITM USDINR 66.5CE February 26th Expiry at Rs 5.1925
  2. Sell 1 lot of ITM USDINR 75 PE February 26 expiry at Rs 3.1700

Total premium collected is Rs 8.3625

Now, on expiry if USDINR was at 71.5 how to calculate profit/loss? I read this strategy as short guts strategy and it was said that it is profitable as long as the underlying remains between strikes. But I think it is a loss as both are ITM shorting. Please help.


#2

On expiry, if the RBI reference rate for USDINR is 71.5. Your positions will be settled at:

  1. USDINR 66.5 CE: 71.5- 66.5(Strike)= Rs 5(Profit of Rs 0.1925)
  2. USDINR 75 PE: 75(Strike)-71.5=Rs 3.5(Loss of Rs 0.33)

Your net P&L will be a loss 0.1375 or 137.5 per lot


#3

Thanks for the explanation


#4

Sorry to bother again. Please clarify what happens to the premium? Is the loss of 0.1375 is subtracted from premium received or the premium is wiped out already ?


#5

When you sell short the contracts, you receive the credit in your account(Rs 5.1925 and Rs 3.17). One expiry, you pay the premium and the position is closed(Rs 5 and Rs 3.5). Hence, the net loss of Rs 0.1375