Written Options and Scenarios

General
1

Would like to know what happens if

  1. you write any stock option and later on value drops to 0 but don’t have any volume to buy it.

  2. A scenario when you buy an stock option for 5 and on expiry its intrinsic value becomes say 10 however no buyer is bidding above 9 and you want to square -off the position. What are the possible options. I mean with complete profit if one needs to exercise how much amount does it require in DMAT

2

  1. You can just let it expire at 0. The entire value by which it drops from where you have written/sold, will be your profit.

    So if you short 100 Nifty 8500 calls at Rs 50, and if NIfty closes at 8490. Entire Rs 5000 (50 x 100) is your profit.

  2. If the liquidity dries up on your option contract, the easiest way to book profit is by using futures. So in your example assuming you had bought a stock with strike price 100 Calls at Rs 5 and now stock has gone to 110, but the best offer is only Rs 9. What you can do is short the stock futures at Rs 110, hence booking profit on your option trade indirectly.

If stock price goes up, the profit you make on option is equal to loss you make on futures. If stock price falls, the loss you make on option will be equal to profit on stock futures.

2 Likes
3

Thanks Nithin for clear explanation