Selling Option Query

F&O
1

I want to test my level in option selling for quite some time and recent margin benefit through hedging methodology just fueled the idea even further. I just want to clarify some doubt which may be sound too basic.I am having following understanding in option selling, Kindly correct me if i am wrong

1.If I sell an option ( call / put ) the moment i sell that option, the premium amount will get credit in to my account (as a phase 1 of my total profit )
2.Then when the time decay happens, it will expire at zero in which i will get further profit like below

Selling ATM Call option of abc company @ Rs 50 (lot size 1000)

  1. The moment i sell the above option (with the required amount / margin ) i will get (50 1000 = 50,000) as premium (profit in my terminology )
    2.Then when time decay happens , the above option will become zero so againt (50    1000 = 50,000 ) will be get credited when i square off my position on expiry.

  2. So total profit is 1,00,000

  3. Is this fundamentally correct or wrong.

Any views in the above scenario will help me to improvise myself in this arena.

2

Doesn’t work this way.

Yes, when you Short and Option, amount equal to Premium * Lot Size (say Rs. 50000) will be credited in your account, but when it goes to 0, only that much (Rs. 50000) will be your profit not Rs. 100000.

Before you start trading Options, do read through Options trading module on Varsity, will help you understand Options better.

3

Hi Vinod,

Options are a complex derivative instrument, the payoff structure is not linear as Futures, it would be really helpful to check Sensibull and understand options before starting to trade.

The terminology " profit " is not the right phrase in this context here, its the premium you have received,

When you have short options ,margins are blocked for the premium which you receive, so until to buy it back by paying some X amount premium, you will not be able to compute P&L. Basically P&L is the difference between the premium received and premium paid.

Let me give an example

Now lets us consider your example of Selling ATM Call option of ABC company @ Rs 50 (lot size 1000) with LTP of Rs.1000/- ,so total premium received is Rs 50000/-

Let’s consider 3 scenarios:

Scenario 1: When LTP <=1000 on expiry day (OTM) ( Profit)

In this scenario, The premium which needs to be bought back, lets consider as ‘0’ , this will be ideal case where you have made profit of Rs 50000/- from the premium received , as you will be buying back at 0 price.

Scenario 2: When LTP =1050 on expiry day (ITM)( Break even)

In this scenario, The premium which needs to be bought back at Rs.‘50’ , in this case you will not make any profit or loss, its a break-even point, here, the difference between premium received and premium paid will be zero,

Scenario 3: When LTP => 1100 on expiry day (ITM) Loss

In this scenario, The premium which needs to be bought back at Rs.‘100’ , in this case you will make a loss, here, the difference between premium received Rs.50 and premium paid will be Rs.100, with a total loss of Rs 50000/- on that trade.

Kindly note, writing options is limited reward and unlimited risk

Hope the explanation clears yours query

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4

Thanks a lot @sachinu @ShubhS9