I have been investing in equities for a past few years. I have been studying FNO from last few months and I have been thinking of keeping aside some capital lets say 1 lakh aside for FNO and using separate demat account for FNO. However before investing, I just wanted to clarify few things.
- Suppose I buy a call options of a stock with premium of Rs 10 today, after couple of days, same option is selling at a premium of Rs 20. so to close my position, I will now sell a call option and pocket the different in premium. Is this how a modus operandi for some ?
Theoretically option seller has high risk but whenever anyone is selling an option, this need not be true as someone might be closing his position as well.
- If buyer does not close his position, his premium is pocketed by seller, but does buyer has any other liability such as taking actual delivery on expiry of option if he has not closed his position. (I know its a option and buyer has an “option” but its theory, I wanted to know if there is any systematic risk. Few days back I read about systematic risks of trading in options so wanted to confirm by understanding. News)
- If seller does not close his position, can he pocket premium from buyer. Does he has any liability for actually selling or cash settling open position ? Any other systematic risk that he has (other price price action against his estimation)
Is there any risk that I need to be aware of before initiating any trade. I have already consider following risks
- price action against my estimation.
- not following the stop loss
- liquidity constraints
Suppose I buy a call options of a stock with premium of Rs 10 today, after couple of days, same option is selling at a premium of Rs 20. so to close my position, I will now sell a call option and pocket the different in premium. Is this how a modus operandi for some ?
**Yes. Profit target should be defined or set for long-term profitable trading. **
Theoretically, unlimited gains are possible for options buyer but practically you need to be more prudent.
Theoretically option seller has high risk but whenever anyone is selling an option, this need not be true as someone might be closing his position as well.
If you are selling the option which had bought earlier, then technically you are closing your positions and therefore no risks which a naked option seller would have.
If buyer does not close his position, his premium is pocketed by seller, but does buyer has any other liability such as taking actual delivery on expiry of option if he has not closed his position. (I know its a option and buyer has an “option” but its theory, I wanted to know if there is any systematic risk. Few days back I read about systematic risks of trading in options so wanted to confirm by understanding. News)
If the option expires out-of-the-money the option expires without any value. However, if option expires in-the-money then the options are automatically exercised and cash-settled.
If seller does not close his position, can he pocket premium from buyer. Does he has any liability for actually selling or cash settling open position ? Any other systematic risk that he has (other price price action against his estimation)
Answer same as above
Is there any risk that I need to be aware of before initiating any trade. I have already consider following risks
price action against my estimation.
not following the stop loss
liquidity constraints
Before trading options you should be familiar with the role of the Greeks in options pricing
2 Likes
Thank you very much for such a detailed response.
If options are automatically exercised, is there systematic risk of STT ?
There was a incident which was widely circulated on social media and trading community (https://www.change.org/p/security-transaction-tax-stt-a-trap-for-traders-and-a-systemic-risk-for-capital-markets?source_location=minibar)
and there is some corrective actions from exchanges but not sure of brokers has enabled “Do not excercise”
(https://www.change.org/p/security-transaction-tax-stt-a-trap-for-traders-and-a-systemic-risk-for-capital-markets/u/21131449)
Thanks alot for such a clear explanation 
