Whenever a buyer or seller pays the premium of the option, does he pay only to book the rights, so that he can buy the stock at the same price

F&O
1

Whenever a buyer or seller pays the premium of the option, does he pay only to book the rights, so that he can buy the stock at the same price,Whether the price of that stock is high or low in the market.

Ex-
If the price of a stock is Rs 200 and its option premium is Rs 10, then i can buy that stock at Rs 190 or at Rs 200 ?

@kk911

2

Hey,

A seller is short the option contract - He is a premium received. The buyer is long the option, he pays the premium to the seller.

In India, options are European in nature and are traded with a CE/PE symbol which means they can only be exercised by the Option buyer on expiry. This is in contrast to American options which can be exercised anytime by a buyer

An option gives a buyer the right but not the obligation to buy or sell the underlying at strike price. However, for the seller it is an obligation. He can get out of the obligation by squaring off or taking an opposite position.

Can you pls translate your example so that I can specifically address it?

1 Like
3

have translated @kk911

4

So the stock here is the underlying - It is trading at Rs. 200

I am assuming you would be buying a call option since you want to participate in price appreciation. So let us assume you believe the stock would rally to Rs. 210 in the current month. So, you will be buying a call option with a a strike price of 210 for Rs. 10 x no of shares in contract

following scenarios possible on or before expiry

  1. Stock stays at 200 , then your call expires worthless and you lose the entire premium of Rs. 10 x no of shares you paid initially
  2. Stock is at 210 on expiry day. Your intrinsic value is still zero , ( Strike price - underlying price) so no profit is realized and you end up losing the premium paid initially
  3. Stock at 220. Now you have a profit of Rs.10 per share as the call option is In the money with intrinsic value of Rs. 10. However, your net P&L is 0 . You paid Rs. 10 for premium and you got a Profit of Rs. 10 on the option, net result is zero
  4. Finally, for any expiry price over 220(your breakeven price) , you will be making profits

Now, above scenarios are for expiry. For days before expiry your option value fluctuates primarliy with underlying’s price (Delta) and time decay (theta) and volatility sensitivity (vega) and gamma (rate of change of delta) . So if you bought a 210 call for Rs. 10 and underlying violently moves to 208 from 200, there is a high chance that the option you bought would probably be 2x/3x the value (rs. 20/Rs. 30) , which is a large profit indeed. This is because at the money options (strike = underlying) have highest extrinsic value