Options give it's buyer the right but not he obligation to buy or sell the underlying option. Writer of the option has the obligation to buy or sell.
In simple words,
If u buy Nifty July 4000 CE, at the premium of 100 rs. u can do 3 things with it.
(1) If Nifty spot goes above 4000, u are 'in the money' means u are in profit.
But u cant excercise the option(make the call writer to sell the option to u) unless it is expiry day(last thursday of July), so u sell it to a third person at the prevailing premium(suppose 120).
This is called "squaring off'.
In this case your profit is 20*50=1000 rs. per lot.
(120-100=20), 50 is the lot size of the Nifty
u can 'square off' your option every day at any time provided there is a person to buy your option.
In liquid stocks/indices this is not a problem.
(2) u wait till last thursday of the July and then excercise the option after the closing hours.
suppose at that time Nifty spot is 4200.
Then your profit is 200*50=10000 rs. per lot.
suppose at that time nifty spot is 3900 then your loss is100*50=5000 per lot.
(3) u dont do anything till the last thursday of the expiry(July in this case)-
In this case your option is automatically settled by the exchange at the closing price.
In this example i have not considered the brokerage.
Always remember, stock options are CA(call american),PA(put American)
And these can be excercised everyday after the market closing hour.
In simple words,
If u buy Nifty July 4000 CE, at the premium of 100 rs. u can do 3 things with it.
(1) If Nifty spot goes above 4000, u are 'in the money' means u are in profit.
But u cant excercise the option(make the call writer to sell the option to u) unless it is expiry day(last thursday of July), so u sell it to a third person at the prevailing premium(suppose 120).
This is called "squaring off'.
In this case your profit is 20*50=1000 rs. per lot.
(120-100=20), 50 is the lot size of the Nifty
u can 'square off' your option every day at any time provided there is a person to buy your option.
In liquid stocks/indices this is not a problem.
(2) u wait till last thursday of the July and then excercise the option after the closing hours.
suppose at that time Nifty spot is 4200.
Then your profit is 200*50=10000 rs. per lot.
suppose at that time nifty spot is 3900 then your loss is100*50=5000 per lot.
(3) u dont do anything till the last thursday of the expiry(July in this case)-
In this case your option is automatically settled by the exchange at the closing price.
In this example i have not considered the brokerage.
Always remember, stock options are CA(call american),PA(put American)
And these can be excercised everyday after the market closing hour.
