Suaring off and Profit Calculation

General
1

Hi All,

A basic question as i am new to Options.

After first week of July 2016 ,market went up and call option premiums also went up.

I don’t want to wait till expiry. In this case i read o trading qna that i can sell the option.

But i want to understand , if this SELL means exit to BOOK Profits and recover the amount paid for buy call.

This SELL hopefully doesnt mean WRITE the same option.

Can someone explain.

Secondly, i couldn’t understand how to calculate what profit i will get in this trade.

I read some pages on the net but its confusing as it mentions if sell before expiry its based on premium.

but i exercise on expiry day then it will take difference of the NIFTY say it was 8400 and moved up to 8500 on expiry day,

then difference is 100 multiplied by number of lots and no premium to used for calculation on expiry day.

There is no example which Cleary explains this on zerodha varsity as well jus for NIFTY options.

Can i get some help to understand this.

Thanks in advance.

2

If you already have an open position, in this case you bought a call option. So u will book profits by selling it. Sell = square off here and not shorting/ writing it.

Calculation of profits/ loss simple. You will get the price at which it is trading

Suppose u have bought 8600 CE at 30 Rs while Nifty CMP is 8500.

If tomo Nifty @ 8600 and ur Call option has value of Rs 50, Ur Profit = 50 - 30 = 20 Rs

If u keep till expiry, this call option will lose time value and if Nifty expirs at 8600, u get 0 (as it expires worthless).

If Nifty expires 8700. 8600 CE value will be 100. Ur Profit, = 100 - 30 = 70

On Expiry, options do not have Time Value.

3

Read this throughly alongwith the questions n answers. And by the end of the topic, all your doubts will get cleared. If not, you can ask those to @karthik and he will surely help you. http://zerodha.com/varsity/module/option-theory/ http://tradingqna.com/user/Karthik

4

in addition to above answers, while squaring off your positions place your orders using the same product type (i.e.NRML/MIS)…if you have bought option using MIS product you should place a sell order using MIS product only then only it will get squared off. if you use different product type for both buy and sell orders you will be creating two different positions…so be careful while you place an order to square off your position…

5

Thanks Charles for the answer with an example.
Now does it work the same way, irrespective of the fact that when i bought the call option it can be OTM ,ITM or ATM. As i new to this i felt ATM or ITM are better to start with.

6

Welcome. yes. everything remains same.

7

Thanks again. Studying further to understand before i start trading options.

8

Thanks a lot ShreyaDR.
I found something very useful in these cases studies.


But i see that in first example the Put trade is squared off even before the Strike price reached.
Is this valid? IS SQUARING OFF allowed even before option reaches Strike Price?
Now the doubt is have is does Square off means i am actually selling this BUY options right to some one else and the option not getting closed completely like on expiry day?
Sorry for basic questions but some are just out of my thinking and i dont get the answers in the theory.

9

yes, it is squaring off from your side. It is Allowed.