Queries on Futures & Option sellers

F&O
1

Sir,

I am a trading member of Zerodha since July `20 I have three queries in F&O

On Futures Contract

I understand that in Futures, a buyer of futures contract can exit the trade before expiry in 2 scenarios.

(i) When the contract moves in his favor , he can exit the trade by squaring off, to book the profit, any day before expiry

(ii) When the trade moves against him, he can exit the trade by squaring off to avoid further losses in the trade, any day before expiry

(iii) By exiting before expiry, buyer of the contract, in fact, transfers his agreement to another buyer in the market

My query no.1 :-

Can anyone clear my doubt on whether the seller of the contract has similar right to exit the trade, any day before expiry, in the similar (all the above) scenarios.?

Options contract

In options, if buyer of Call & Put have an opportunity to profit from difference in premiums before expiry, they can close the contract before expiry by selling the option on the same stock at the same strike & at the same expiration to offset his position. His profit is (higher premium minus premium paid earlier)*lot

My query no.2

Can anyone clear my doubt on whether the seller/ writer of Call & Put options have similar opportunities to close the trade, any day before expiry, by buying the option on the same stock at the same strike & at the same expiration to offset his position and to profit from difference in premiums?

My query no.3

In options, I find a distinctly different trade on allowing profiteering from difference in premiums before expiry Trading on change in premium pertains to value of options contract based on value of premiums as opposed to trading on changes in value of the underlying asset . Is it because of Eurpean Option whereby exercising right can be permitted only on the day of expiry-right being on value of stock and not on value of premium?

Am I correct or wrong on my view on query no.3? Please understand that I need more clarity on my reasoning and not a question of myself being right or wrong.

Thank you & regards

M.Govindarajan

2

Yes, even Seller of Futures contract can exit the trade anytime before expiry.

Yes, even Option Seller can exit his position before expiry to profit from decrease in premium or to limit his losses if premium increases.

Trading in Options before expirey is done for profiteering from movement of premiums, but premiums move based on movement in underlying asset only.

To understand Futures and Options in detail, would suggest you read the following two modules on Varsity:

3

Sir, Apropos reply, I am sorry to state here that I have raised three queries only after going through thoroughly Zerodha`s Varsity on F& O Segment not once but twice. Moreover, I have not just ended with the contents of Varisty, I have also gone through comments of readers and replies from Sri Karthik to verify whether anyone has raised similar ones as mine. Hence, please do not quote Varsity.

If you still feel your reply to my query is from Varsity only, kindly quote the relevant portion in Varsity where it has been deliberated. Kindly understand that I have seriously searched various books and journals for clearing my doubt. Unfortunately, I have not succeeded till now.

Please blame me not as I know that in Q&A forums one will receive just yes or no type replies without any conviction back up. That is the reason my third query raises logical reasoning . Please, I shall be happy If someone respond with authoritatively reply quoting rules and regulation from SEBI/NSE.

Once again sorry to the respondent and pardon me if I have hurt the respondent to my query.

Thanks and regards,

M.Govindarajan

4

Futures and Options is vast subject and can be tricky to understand in one go, so feel free to ask your queries on the forum.

5

Sir, repeating my query
Sir,

I am a trading member of Zerodha since July `20 I have three queries in F&O

Futures Contract

I understand that in Futures, a buyer of futures contract can exit the trade before expiry in 2 scenarios.

(i) When the contract moves in his favor , he can exit the trade by squaring off, to book the profit, any day before expiry

(ii) When the trade moves against him, he can exit the trade by squaring off to avoid further losses in the trade, any day before expiry

(iii) By exiting before expiry, buyer of the contract, in fact, transfers his agreement to another buyer in the market

My query no.1 :-

Can anyone clear my doubt on whether the seller of the contract has similar right to exit the trade, any day before expiry, in the similar (all the above) scenarios.?

Options contract

In options, if buyer of Call & Put have an opportunity to profit from difference in premiums before expiry, they can close the contract before expiry by selling the option on the same stock at the same strike & at the same expiration to offset his position. His profit is (higher premium minus premium paid earlier)*lot

My query no.2

Can anyone clear my doubt on whether the seller/ writer of Call & Put options have similar opportunities to close the trade, any day before expiry, by buying the option on the same stock at the same strike & at the same expiration to offset his position and to profit from difference in premiums?

My query no.3

In options, I find a distinctly different trade on allowing profiteering from difference in premiums. Trading on change in premium pertains to value of options contract based on value of premiums as opposed to trading on changes in value of the underlying asset . Is it because of Eurpean Option whereby exercising right can be permitted only on the day of expiry-right being on value of stock and not on value of premium?

Am I correct or wrong on my view on query no.3? Please understand that I need more clarity on my reasoning and not a question of myself being right or wrong.

Thank you & regards

M.Govindarajan

6

Yes, even the seller of Futures contract can square-off his position before expiry.

Yes, Option seller can square-off his position before expiry to benefit from movement in premium price.

Option premiums change based on changes in underlying value only. Eg. If you take long position in Call Option this will increase in value when underlying price increases, similarly if underlying price decreases the price of Call Option will decrease as well.

7

Sir, Thank you. Kindly refer your reply.My first query relates to Futures and not Options

Regarding your reply to 3rd query, my observation is thus. I know premium changes when underlying assets price changes. Options value is not solely on the premium as its value is changing on change in underlying PLUS time value. My doubt is, when the trade is allowed on change of premium and to close it, why not allowing the contract itself and exit the trade like in Futures before expiry? Sir, Without mistaking me on your interpretations, kindly quote the relevant rules and regulations of SEBI, as I am doing some research on these.

Thanks & regards

M.Govindarajan

8

hey bro… both futures and options are different in some aspects… futures you get into contract at whatever price it is trading at with option you have to chose what strike you need to trade… that is why it is traded with premium value and not contract value.

you don’t need any sebi documentation to learn basics about f&o, you can refer to varsity or content on internet and learn about defination of both contracts… if you know defination then you will know both futures and options are different in some aspects that is why one is traded at market price and other in premiums.

p.s: this things are little confusing at first but give it a little time you will understand everything.

9

Got it. Thank you