Understanding Options with Examples

#1
With stock options I have a few general queries

1. Say I have a buy option or call option, I don't have to wait until maturity but can exercise it any time before the expiry date if it is above strike price, I am sure this is the case. Am I right?

2. I am confused, what is the difference between exercising the option and selling the option? If I have a call option, I understand if it is above the strike price I can exercise it, but can i sell it? What does it mean?

3. Does CE refers to call option and PE refers to put option?

Also to be a writer of option (the one who does not exercise option) does one choose sell option in HDFC while placing an order?

4. Looking at a practical example as per prices of Friday

Dabur India which has a market lot of 2000.

Say I go for a call option for the expiry 31 May.

The strike price is 110

The option price is showing as 2.80 for call option, strike price of 110

So if I am not mistaken the premium I would have to pay is 2.80*2000 = 5600.

Now as far as I understand dabur should reach at least 113 .i.e. 3*2000=6000 before end of may for me to exercise the option and be in profit.

6000-5600= 400 profit approx

Put Call

Say again with dabur I buy a put option for strike price of 90.

The price is showing 1.35 so the premium is 1.35*2000=2700.

and dabur should fall to 88 for me again to be in profit, i.e 2*2000=4000
4000-2700= 1300 profit approx.

Is this right? Is this how options trading work?
 
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#2
Can I buy any stock option on say monday & let square off the position on tuesday?

Also I have 1 basic query -

Suppose I buy a call option of reliance @ 830 strike price & now the market price of reliance is 825.

Can I square off the position?

I mean spot price is less than strike price & I even if I am in loss can I square off position on any day before expiry or even on intraday basis?

Let's forget premium & all other charges.

Thanks in advance.
 

man4urheart

Well-known member
#3
Yes you can square off even after 1 minutes! You will end up paying a lot of brokerage charges! (150 RS).

Also in second case also you can square off when you are making a loss!

Remember Options is where 90% of traders make a loss!

Don't read book of options and jump in! Do some paper trading!

If you still want to do it, my suggestion is burn your fingers with MINI NIFTY OPTIONS!

The biggest play in options is volatility! As of now THE VIX is at 18 all time low! It is good time to buy options but you need strategies to play! i.e. strangle / straddle where you really have 50% chance to make money!

But buying straight speculative one sided options (Naked options) is losers game!
 
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