Exercise an Option?

#1
Sir,

Stock market is not my field I am Hardware Engg. But i am interested in this stock market.

can we sell(short) PA /CA (option) before buying?I want to know

can we sell(short) PA /CA(option) before buying?

As we can do in equity and futures.

I want to ask u "the option is exercised" means kya?
 

Alchemist

Administrator
Staff member
#2
Yes you can sell options (known as writing options).

Risk of writing a call is similar to shorting the futures....higher the stock moves..bigger are your losses.

Risk of writing a put is similar to buying futures...lower the stock goes...bigger are your losses.

However the scope for profit is limited to the option price.

Sometimes the options may get exercised.

For example a stock is at Rs 90 and you sell 95 call option for Rs 2.

Now suppose the stock moves to Rs 105 and the value of the option becomes (approximately) Rs 11.

The buyer of the option wants Rs 11 for his 95 call option, but there are no buyers.

So what will he do?

He exercises his option...which is equivalent of asking to buy the stock at Rs 95 (as it is a call option.)

So the exchange will give him the price difference between the market price of the stock and the call option strike price.

This will be Rs 10.

This Rs 10 comes from any one option writer who wrote a 95 call option. This may be any one.

It is not necessary that just because you sold the option to the particular person, you have to pay when he exercises his option.

Any one option writer is chosen randomly by the exchange.

If you still have doubts, please ask. :).
 

nda1

New member
#4
What is the profit on exercise of call option both stock & index

Dear Sir

Could you please tell me what is the exercise price whwn we exercise the call option bought by us. ie is the spot price at the time of exercise or the final settelment on that trading day, with an example please.

Regards,

NDA
 

Alchemist

Administrator
Staff member
#5
Dear Sir

Could you please tell me what is the exercise price whwn we exercise the call option bought by us. ie is the spot price at the time of exercise or the final settelment on that trading day, with an example please.

Regards,

NDA
If you exercise an option on a particular day, the spot price at the end of the end will be considered.

For example, imagine you have IFCI 55 call option, that expires on 26th July 2007.

Now on 16th July, suppose the price of IFCI has moved up to Rs 75.

There may be no buyers for an option, that is so deep in-the-money.

Thus you decide to exercise your call option.

If the closing price of IFCI on 16th July is Rs 75, exercising the option will bring you an inflow of Rs 20 per share.

As Indian stock options are cash settled, you will get the net difference between the spot price and the strike price (Rs 75 - Rs 55).
 
#6
If you exercise an option on a particular day, the spot price at the end of the end will be considered.
One important point got unnoticed when I read this first time couple of months back, I learnt it and want to highlight that for other readers.

If we place the exercise order while the market price is 75 and the closing price of IFCI is 72; the exercise will be settled at 72.
This is perhaps another reason why people opt for closing the long position by shorting the same option rather than exercising it.
Along with the Time Value, they get the Intrincic Value what they see.
 
#8
It is not necessary that just because you sold the option to the particular person, you have to pay when he exercises his option.

Any one option writer is chosen randomly by the exchange.
What is the reason that option writers are chosen at random when an interim exercise is made? This happens not only in India but in other countries as well.

Why can't the exchange go back to the original writer? Is there a technical reason?
 

Alchemist

Administrator
Staff member
#10
Why can't the exchange go back to the original writer? Is there a technical reason?
The original writer may no longer be having a short position.

He may have bought it back for somebody else.

This sell-buy chain may be very long.

It will be cumbersome for the exchanges to maintain a list of all option trades and then use this list to check corresponding sellers of all exercised options.

Thus, assignment is usually done on random basis.
 
#11
There are no more American options existing in India for equities. All options from this January have been converted to European type.
By all options do you mean only stock options or index options as well? As far as I know, index options are still exercised on last date only so they are still American type options. Please correct me if I am wrong.
 

Alchemist

Administrator
Staff member
#12
By all options do you mean only stock options or index options as well? As far as I know, index options are still exercised on last date only so they are still American type options. Please correct me if I am wrong.
American options can be exercised at any time.

European options can be exercised only on expiry.
 
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