Say, if i wrote call option at strike price of 500. Then suddenly market goes up the strike price, lets say it goes to 1000. So i close my option selling position by buying back my call option contract. Now, as the buyer of that contract is already on profit side, as market is still going up and reaching 1500, then who will gonna pay the remaining profit to buyer?
Because, as a seller, i have closed my position in 1000, so when market goes to 1500, then from where the remaining profit will come?
And if you say that another seller will take my option selling position, then do i need to wait for that seller to take my position before i close my option selling position?
You sold a contract and squared off with another option seller. The buyer who initially bought your contract still holds the bought option (or may have sold it to another)
You can buy or sell only if there is some one else on the other side to sell or buy respectively.
Profit / Loss is net difference between buy and sell price. Once you have exited your position the pnl is credited to your account.
On expiry of a contract if it is still open it will be settled at intrinsic value.
So in your hypothetical example if the buyer is able to find another buyer at 1500 he can realise his profit. If he is not able to find a buyer at 1500 and he holds the contract open till expiry it gets settled - cash settled for index options and physically settled for stock options. What he does after you exit your position is not going to have any bearing on you.
Okk, so lets say buyer cannot find another seller, so at date of expiry, it gets settled for cash, but who will give cash to buyer if there no seller on other side???
FNO trading is a zero sum game if we ignore the transaction charges. Money just gets transferred from one account to another.
In your hypothetical example when you buy to exit your short position there has to be a seller on the other side. If market keeps going up that seller will realise losses on expiry (if he holds until then) and equivalent amount adjusted for transaction charges gets credited as profit to the orignal buyer.
Okk, so you mean that when i buy to close, i don’t buy that contract which i have sold, but i buy contract from another seller at that time. Am i right???
See there are lot of buyers and sellers in the market. Not just you and the counterparty when you first sold. So yes in all probability you will be buying from some one else when you exit the position. There is however an ultra low probability that you may buy back from the orginal seller.
Okk, that’s right, but i also want to know how it works under the ground, meaning that, how can i close my option selling position by buying contract from another seller?
Okk… Keeping all things aside , just tell me who keeps the premium when I execute buy to close order in option selling???
For your reference, assume, I have sold 1 call option contract, now I want to close my position, so I execute buy to close order, when i do so, i exactly buy back my own call option contract, which i sold previously, so who keeps the premium money, which i have paid while executing buy to close order???
When you sell option to someone, koi “Shaadi ka Pavitra Bandhan” nahi banta tum dono ke beech mein. You don’t even know to whom you have sold the contract. Now, at any given moment of time, there will be many many traders holding either short or long side of the contract, both sides equal in terms of Open contracts.
Now when you go on to “buy” the contract to “close” your open short position, you punch in the order. This order literally mean that you are asking your broker to look for some potential seller, who can sell the contract to you that you want to buy, as per your conditions. Now broker will search for such counterparty, take money from you and pay it to the counterparty, and will take the contract from the counterparty and give it to you, thus squaring off your position.
Contract is like currency note. No name is written on “your” contract. So when you back back the contract you have sold, you will get back “the contract” not “your contract”!
I suggest you read varsity thoroughly and deeply before all this.
You had understood it 6 days back. Still, you want to keep all things including your cognitive faculties aside and want to ask same question again and again and again.
Okk, got it! Now i wanna ask what happens if there are no more sellers left or there are no more buyers left in the market for the same strike price???
Lets say i wanna square off my call option selling position, but there are no sellers left for that strike price in the market, then i can not square off, right?
And sorry for irritation guys, i’m trying to understand options in 2-3 days it became confusing.
Yes you cannot square off then. If that remains the situation till expiry your open position will be settled at intrinsic value after expiry - cash settled for index options and physically settled for stock options.
