If we sell a Put option & dont get a seller to buy what is the situation
- Thread starter ssrinivasa
- Start date
Hi ssrinivasa,
Buy XYZ Stock - Sell XYZ Call combination is referred as Covered call strategy. I suggest you spend time
a) reading and understanding the strategy
b) Understand the scenario in which this strategy is used,
c) what are risk and rewards of the strategy.
Both the legs of strategy are to be entered at the same time (theoratically), not at the time of expiry. Nobody stops you from breaking this rule if you decide to hedge the position few days later.. but know it well that you are carrying the risk for these 2 days.
Hope this helps.
Happy Trading.
Buy XYZ Stock - Sell XYZ Call combination is referred as Covered call strategy. I suggest you spend time
a) reading and understanding the strategy
b) Understand the scenario in which this strategy is used,
c) what are risk and rewards of the strategy.
Both the legs of strategy are to be entered at the same time (theoratically), not at the time of expiry. Nobody stops you from breaking this rule if you decide to hedge the position few days later.. but know it well that you are carrying the risk for these 2 days.
Hope this helps.
Happy Trading.
Hi V from TCR,
I am sorry to disagree with your example on hedging the SOLD option by buying PUT or selling Future. Following is the reason behind it -
1) When you BUY a CALL, you want market to go up, so when you SELL the CALL, you want market to go down.
2) When you BUY a PUT, you want market to go down
3) When you SELL future, you want market to go down.
Hedging is the situation when one of the leg is benefited by market going up, and other leg is benefitted when mkt is going down.
In yr example, (sell call, buy put, sell future), none of them is going to benefit if mrkt is going up. So you are not hedging here.
All 3 position will benefit only when mkt is going down. That is Leveraging, not hedging.
To hedge a Sell Call position, one needs to take next position which will benefit from the market going up (i.e. buy call, buy stock, buy future etc). There are more advance options as well but Let me not confuse the readers of this thread.
Hope it is clear. Any comment?
Happy Trading
I am sorry to disagree with your example on hedging the SOLD option by buying PUT or selling Future. Following is the reason behind it -
1) When you BUY a CALL, you want market to go up, so when you SELL the CALL, you want market to go down.
2) When you BUY a PUT, you want market to go down
3) When you SELL future, you want market to go down.
Hedging is the situation when one of the leg is benefited by market going up, and other leg is benefitted when mkt is going down.
In yr example, (sell call, buy put, sell future), none of them is going to benefit if mrkt is going up. So you are not hedging here.
All 3 position will benefit only when mkt is going down. That is Leveraging, not hedging.
To hedge a Sell Call position, one needs to take next position which will benefit from the market going up (i.e. buy call, buy stock, buy future etc). There are more advance options as well but Let me not confuse the readers of this thread.
Hope it is clear. Any comment?
Happy Trading
If it is in the money just let it expire. You retain the premium.
If it out of the money protect yourself by buying an option to offset the loss the may eventually result at expiry. In normal cases you retain the premium if it is not exercised. But as the market is hungry for money you can get severely penalised for keeping and open sell position at expiry. The NSE exchange expiring positions will be squared off without contract notes!!! Really these squared off traded positions have no trade details attached neither a contract note. So you will be in trouble.
If it out of the money protect yourself by buying an option to offset the loss the may eventually result at expiry. In normal cases you retain the premium if it is not exercised. But as the market is hungry for money you can get severely penalised for keeping and open sell position at expiry. The NSE exchange expiring positions will be squared off without contract notes!!! Really these squared off traded positions have no trade details attached neither a contract note. So you will be in trouble.
"If it is in the money just let it expire. You retain the premium.".
As I understand that ITM options have value at expiry and seller has to pay this value to buyer. OTM options have no value hence seller retains the premium and buyer books the loss.
This is opposite of what you are saying, Chakravu.
Are you sure about what u are sayint ? Quite possible, we both are mentioning the same stuff but I am not able to understand you.
Plz give an example ?
Happy Trading.
As I understand that ITM options have value at expiry and seller has to pay this value to buyer. OTM options have no value hence seller retains the premium and buyer books the loss.
This is opposite of what you are saying, Chakravu.
Are you sure about what u are sayint ? Quite possible, we both are mentioning the same stuff but I am not able to understand you.
Plz give an example ?
Happy Trading.
HI AW10
Here is the simple example. I sold a Reliance put option strike price 2350 for premium of 85 rupees on xyz date. Reliance was trading at 2425 (spot). My view was it wiould not go below 2350 till expiry. Today I am in trouble because no seller is available. I am helpless because there is no way I can buy back that option. My "enemy" the option buyer is enjoying this situation because he can exercise the option at any time because it is deep in the money, and chances are that it will be against me because exchange selects the writer of the put randomly. Even if no one exercises till expiry it will be exercised by the exchange. Suppose on the day of the expiry reliance closes at 2000 so the difference 2350-2000= 350*75 i.e. 26250 will be deducted from my margin deposit. Wheras I received by way of premium only 6375. This is without factoring in brokerage and other charges.
Hope you understand now.
Here is the simple example. I sold a Reliance put option strike price 2350 for premium of 85 rupees on xyz date. Reliance was trading at 2425 (spot). My view was it wiould not go below 2350 till expiry. Today I am in trouble because no seller is available. I am helpless because there is no way I can buy back that option. My "enemy" the option buyer is enjoying this situation because he can exercise the option at any time because it is deep in the money, and chances are that it will be against me because exchange selects the writer of the put randomly. Even if no one exercises till expiry it will be exercised by the exchange. Suppose on the day of the expiry reliance closes at 2000 so the difference 2350-2000= 350*75 i.e. 26250 will be deducted from my margin deposit. Wheras I received by way of premium only 6375. This is without factoring in brokerage and other charges.
Hope you understand now.
Thanks ARMHM for explanation.
I am 1000% in synch with you. RIL 2350 Put option is ITM when RIL spot price is 2000.
This ITM option is excercised by exchange on expiry and whatever is the value, the money is taken from Option seller.
This is not what was suggested by Chakravu. ("If it is in the money just let it expire. You retain the premium.").
As a option seller, we can't let the ITM option get expired. Option buyer has this privilage but not the seller. As a seller we got to manage / hedge it so that risk at expiry is managed.
Happy Trading.
I am 1000% in synch with you. RIL 2350 Put option is ITM when RIL spot price is 2000.
This ITM option is excercised by exchange on expiry and whatever is the value, the money is taken from Option seller.
This is not what was suggested by Chakravu. ("If it is in the money just let it expire. You retain the premium.").
As a option seller, we can't let the ITM option get expired. Option buyer has this privilage but not the seller. As a seller we got to manage / hedge it so that risk at expiry is managed.
Happy Trading.