I posted this question in zerodha but somehow did not understand… so pasting it here as well. Please clarify…
Say I have one lot of Reliance (250 shares) in holding and I purchased them at 2200.
Now I sold call of OCT 2600 CE at premium of 62. This means I got premium of 15500 (62*250). Now during expiry it closes at 2650 which means it is ITM, which means I need to give delivery.
But how does PnL calculation works in this case?
I mean if I had sold the holding stock in market then I would have got [2650-2200] * 250 which is 112500, but in this case of option physical settlement since i need to give delivery of stock, it gets deducted from account, which means essentially I am making no much profit except the premium of 15500. Am I getting any benefit of stock price high other than premium? Not sure if I understood physical settlement in case of call writing.
You purchased the shares at Rs. 2200 and will be delivering those in physical settlement at Rs. 2600. So the difference between the two is your P&L on the holdings. As an option seller, you also get to keep the premium received ie. Rs. 62 * lot size.
Does it happen automatically? I mean since I already hold the stock in my demat, then on the expiry day settlement, will 250 shares gets debited from account? Will the price difference gets (2600-2200) credit in my demat balance ?
Upon expiry of Short Call Option, the shares will be debited from your account for delivery. You don’t have to do anything from your end. You will receive amount equal to Strike Price (2600 in above example) * Lot Size (250) in your account. You can check out this support article to know how the physical settlement works.
Your Profit will be the Premium received + Capital Gain, which in this case will be 15500 + 112500 = 128000.
Suppose it closes at 2640, You get the premium of 15500.
Suppose it closes at 2700 , You still have 1.28 L profit, but a notional loss of 12500 (50*250).
But ask yourself this question, If you had not written a 2650 CE, would you have held the underlying till expiry, or might have sold it much earlier (say 2400). So you are good, and will slowly get better at it.