Please help me understand consequences for cash secured put selling

F&O
1

For example Gail …current price is 82.55 and I am selling Rs. 77.50 Strike price put for Rs. 1.30 and lot size is 5334.
expiry is April 30 20.

Now what can happen if the price suddenly goes down to lets say 70. So I have to buy whole lot at 77.50 correct?
which is 413385 Rs.

What else I can do on the day of expiry or day before ? can I buy same put back and pay the difference in premium(which I pay - which I received ?)

Also when I sell the put what are the govt charges ? is there any calculator that can tell me total govt. charges or break even point?

2

I asked this question in different way.

Basically when price reaches 70 you are incurring loss of Rs 7 per share. If u let it get exercised by waiting till expiry, broker will debit 77X1 lot size equivalent money and shares will come to your demat account in t+2 days. The premium u collected earlier will be yours

But in practical aspect what will happen is broker will square of ur written put at 2 PM on expiry day and u have to cash settle that loss.

On same time 2PM, if u prefer u can buy that gail one lot size at market price of Rs 70 in cash segment.

The loss will almost be same.

Coming to STT, during square off of ur put position there will be no STT as u have paid STT while writing the PUT option.

However if u buy for delivery in cash segment normal STT charges based on delivery type will be charged.

For writing a PUT break even is when spot price starts going down from strike price but ur loss is within the range of premium u collected.

If spot price keeps going down beyond the premium value that u collected, it will be loss beyond the break even.

3

So broker will square off without my consent ?

If I or broker don’t square off before and let it expire …you said there will be delivery …in that case what will be STT?

I understand this but when we only consider premium and spot price …we don’t consider all govt charges…and that is what I meant by real break-even (practical not just theoretical) I am worried about govt. charges because lets say I take a trade which has very low premium than considering govt charges and brokerage it might not be worth it.

4

Let us say u carry ur write put option till expiry

Strike price 77 and on expiry scrip closed at 70.

Now as u have not squared off ur write PUT option u have to pay 0.125 percent STT and take delivery of shares just like cash segment STT. U have to pay STT on entire contract value and buy the lot size shares at 77 per share rate even though in spot the same scrip is at 70

But if option is squared off no STT as u have paid STT on premium value while writing the PUT option

Yes brokers may forcibly square off ur written put on expiry day. Check each broker rules thoroughly

Dont worry about STT and brokerage as they will not be very much. As this is scrip based derivative u know that STT for ITM non squared off put option writing will result in STT levied on entire contract value.

The point u have to get worried about is writing options. Writing put or call is not meant for retail traders. They are for institutions and hedge fund managers.

5

Can you please clarify when you said pay stt on entire contract value?
Can you use above example?

6

Strike price 77.5. 1 lot size is 5334.
So entire contract value 77.5 X5334 = Rs 413385.

So if u dont square off this put option and spot becomes Rs 70 per share ,u have to pay full 413385 PLUS STT 0.125% on full value of 413385 PLUS applicable brokerage and take delivery of GAIL of quantity 5334. U can keep premium value earlier collected.

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7

I guess I have the option ‘do not exercise’ before expiry correct? if I do that what will be STT?
And somehow my understanding is …(if I dont square off) even if I let it expire …STT will be on (strike-spot) so in this case (77.5-70)=7.5 x 5334 … can you please confirm?

8

Sir u have to read thoroughly option basics

Dont exercise is for option buyers who sit on border line profit on expiry day

In ur case u have written put option and spot has already breached 77.5 strike on down side and reached 70. There is no choice for u. Ur put position has to be squared off with loss or if u let it expire u have to take delivery of 5334 shares. Delivery STT is not on premium value but entire contract value.

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9

ok so best option is to square off with loss instead of letting it expire.
But have you seen that you want to square off ( I.e buy ) but there are not sellers before expiry ? I mean liquidity problem?

10

I think that is why broker is force squaring off well in advance…also even though name sake physical settlement exist at expiry for individual stocks, for all practical purpose there is no such physical settlement encouraged by any broker.

So either u square off or on day of expiry broker squares off. If there is no enough liquidity and option gets exercised, onus is on client to take delivery at agreed strike price of 77.5 at which put option was written

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