Who sells options contracts?

General
1

I had few basic questions related to options contracts…

  1. Premium of a contract is based upon the blackscholes formula. However, who sells the first contract is it the exchange? or trader

  2. Can the total quantity of all (PE+CE) contracts increase during the month? or let say 3 month period.

The reason is yesterday (CMP RCOM-EQ 82.5) I bought RCOM FEB CE @85 & RCOM FEB PE @80. However, RCOM fell over 2-3% today and my CE option reduced by 35% but my PE option increased only by 7%. This made me belive may be i don’t understand this instrument.

2

Hi,

The contracts are provided by exchange to sell or buy, so other user/HNI/FII would have sold it to you.

When you bought these, you have bought ATM call and OTM puts,now with the fall OTM gained less but ATM CAlls lost more, 

Premiums are based on the time left , how the instrument will behave in the future, Imagine if more people are believe that RCOM will go further down then you will see your Puts gaining more.

Hope this helps

Aru

1 Like
3

  1. Yes the trader sells it first, not the exchange. But while doing the initial trading when a new contract is available at the exchange on the day after expiry, traders will use the theoretical Black Scholes formula and arrive at an approximate price which they need to sell that contract. So they place a limit sell order with that approximate price and start trading. Later when actual trading happens, the option price will try to be near the black scholes formula, but will vary based on the value of Implied Volatility which keeps on changing based on market sentiment.

  2. Yes, the total number of contract PE+CE can increase, but only up to a certain market wide limit. After that the trading in that security will be banned by the exchange until some contracts get closed and the open interest (total number of contracts) come back to normal acceptable range.

Regarding market wide limits, if you want to know more read this http://www.sebi.gov.in/faq/derivativesfaq.html

Regarding securities which are under ban period, refer this http://www.nse-india.com/products/content/derivatives/equities/sec_ban.htm

  1. The option market behaves non-linearly. The futures market is almost linear but there are times in which futures also go out of theory. You observe the market and do virtual trading of futures and options in NSE Paathshaala to understand the F&O in a better way.
4

@AastroGuru, beautifully answered.