Selling Call / Put options

#1

I have sold Call options with strike price of 10900 and have received the premium amount. Should I compulsorily square off my position before expiry or can I just not do anything and the option will expire?

#2

Nope… you have to square off the position.

#3

Hey @shivaq - You can do nothing and it will expire. You will get the entire premium. You do not have to compulsorily square off.

Here are a few practical trading considerations which might help:

1) When you are close to the expiry and the option is deep out of the money (Say NIFTY at 10600)
In this case, you should square off because there is no premium or time value (theta) left in the option. You will be exposing yourself to a Deep OTM sell if you keep the option, which is like selling a lottery, and you will be blocking precious margin to get a small premium.

2) When you are close to the expiry and the option is near at the money (Say NIFTY around 10900)
Tricky situation. There is time value left in the option. Depends on your market view in this case.

3) When you are VERY close to the expiry and the option is slightly in the money (Say NIFTY at 10950)
In this case, if you think the market is not going down, you should definitely square off. The reason is, because of STT consideration, you might be able to get a lower price to square off as a seller, since the buyer will square off at a lower than intrinsic value price to save STT.
(Feel free to ask me how this works if this is not clear)

4) When you are close to the expiry and the option is deep in the money (Say NIFTY at 11100)
In this case, the sell call option is as good as a futures short because there is not much time value left in the option, and delta is close to 1. So square off if you think market is directionally up. Also STT will play in your favour and get you a lower price to square off as a seller in this scenario.

If you want to figure out the time value left in your option, please try trade.sensibull.com/analyser

#4

i am still learning F&O hence this question .when you sell put/call option means you are eating the premium and taking unlimited risk .how the margin is calculated /taken by broker /exchanges ? PLEASE MAKE ME UNDERSTAND .

#5

Hey @sabkaview

  1. When you sell options, sure your risk is theoretically unlimited. But it also has a low chance of happening. Let us say NIFTY is at 10800, and I sold 10500 NIFTY Put at a premium of 100 Rupees, when NIFTY is at 10800. For me to lose money ,the Index has to close below 10500-100 = 10400. That’s almost 4%. How many times does index move 4% a month? Very few

  2. Think of buy options versus sell option. Let us say you have a down view. You can either sell NIFTY 10800 Call for 100 Rs, or buy 10800 Put for 100 Rs. For the call to make money, you just need to make sure that Index is below 10900. For the put, you need it below 10700. So in selling the call you just needed to make sure you were not terribly wrong. For the put, you had to be right by 100 points plus. Of course, if nothing happens, and index stays at 10800, you make 100 Rs on call and lose the entire premium on put

  3. Think of LIC. When they sell you or me an insurance policy for 20k a year premium and eating it, they are taking unlimited risk. But what are the chances that (God forbid) something happens to us untimely? This is a great business, which is why all insurance companies are profitable.

4) You do not have to play unlimited losses. You can limit your losses by doing spreads.
Example -
Call Spread. When you sell a 10800 call, buy back a 10900 call so that your losses are limited after 10900
Put Spread. When you sell a 10600 Put, buy back a 10500 call so that your losses are limited after 10900

So now, all is well :slight_smile:

Here is a video which makes it crystal clear.

And a blog post
https://medium.com/@BeSensibull/buying-options-the-myth-of-limited-losses-482dbd8c2442

Having said that, please don’t sell single stocks options. That is scary stuff.

The margin calculation

Exchanges take a bad scenario, and make sure you post enough margin to cover those losses.
For an index, this number is around 7.5% move, and for single stocks, this number is higher because they move more than an index.

Let me know if this is clear

Here is the NSE link to margin logic (Looong)

3 Likes
#6

Dear Sensibull :Thanks for the excellent information which will be very helpful as and when i decide to do f&o trade…as a matter of fact one of my friend who is a big player in F&O mostly short selling and eating premium asked me ,considering huge amount of margin he has to maintain with one broker should he shift part of his future business (obviously margin too ) to my broker .now please help me in understanding what is single margin (only exchange margin ) his broker charge him wherein according to him most of the broker charge double margin ?

1 Like
#7

Hey @sabkaview,

There are two parts to the margin:
SPAN margin - which goes to the exchange for safety - Majority of the margin is SPAN
Exposure margin - which the broker keeps for safety - the rest of the margin

Example - NIFTY future
SPAN - 40,000
Exposure - 24,000

SPAN has to be compulsorily collected, Exposure was optional.

So some brokers were not collecting exposure and allowing clients to trade without giving it. But I think that is changing and SEBI is asking for the full amount to be collected - both SPAN and Exposure.

@siva is the expert on these thing. Siva can you please confirm this?

1 Like
#8

Right, from june 1st the new margin circular which says both span and exposure are required will come in to effect, can check this for more info.

2 Likes
#9

This also means pretty much every broker will now have to charge the same margin. Right @siva?

#10

Ideally yes.

2 Likes
#11

is it advisable to keep huge margin fund which is in 8 figure ,with a single broker .the broker is neither a discount broker nor a corporate house but a pvt ltd firm limited to only one city .

#12

@sabkaview

Honestly, it is as good as asking the question

Where do I make a 5 Cr bank fixed deposit?
Choice 1: In a co-operative bank, chit fund etc.
Choice 2: HDFC Bank, State Bank of India, etc

I would tend to go with a bigger name simply because they are unlikely to fail, and they are under closer surveillance by RBI. Even if they fail, the government might bail them out because they are systemically important.

Similarly, a big broker is less likely to fail. And they are more closely monitored by SEBI.

My opinion. Not theory or facts.

#13

LOVED this line … “Even if they fail, the government might bail them out because they are systemically important.”

#14

:smiley:

#15

Thank you very much for the comprehensive response. Much appreciate.

#16

My pleasure @shivaq

#17

I am new to options and was wondering what’s is the point of a short strangle (and iron condor) when I can just do a deep otm sell call and worry about only 1 side of the move? Am I missing something?

#18

@Sensibull why was your reply for @shivaq is a sell put related?? Not on what he asked like sell call?? Where 10600 is in the money not out of the money

#19

In that case there is high delta, and it is not a lottery. It is a future

#20

In ITR4 the turnover The F&O turnover to be shown in ITR 4 is the contract turnover or the total sum of profits and losses and premium received on sale of option. Also for the intraday the turnover is the contract turnover or the sum total of profits and losses? Clarify