Op­tions Sell­ers and Their Role in Nifty Op­tions

Last Mon­day we ex­plained the ba­sics of in­dex op­tions . In this edi­tion, fo­cuses on op­tion sell­ers and their role, spe­cific to Nifty op­tions.

The Economic Times - - Money -

which he loses stands at 10,950 (10,800+150). Above 10,800 his profit keeps shrink­ing till the breakeven point . The max­i­mum he can earn is

₹ 150 a share , while the buyer’s profit is un­lim­ited and the loss lim­ited to the pre­mium .in that sense the op­tion seller re­ceives lim­ited profit but can be ex­posed to un­lim­ited loss .

How­ever, op­tions are priced in a man­ner that in­vari­ably re­sult in sell­ers pock­et­ing pre­mium paid by buy­ers . It is es­ti­mated that a seller makes money 8 out of 10 Times, stack­ing up the odds against an op­tion buyer .

Now as­sume the Nifty closes at 10,700 or at 10,800 on ex­piry at Jan 31. The call op­tion buyer loses all of his pre­mium to the seller in the for­mer case and his pre­mium drops sharply , to near zero, if Nifty ex­pires at the strike he pur­chased on ac­count of time de­cay — one of a key pa­ram­e­ter to cal­cu­late an op­tion’s price .

In case of a put buyer, a seller pock­ets the en­tire pre­mium if the Nifty ex­pires above or at the strike sold . He loses if the Nifty closes be­low the strike sold mi­nus pre­mium re­ceived . For e.g., he sells a 10,700 put ex­pir­ing Jan­uary 31 at ₹ 100 a share pre­mium and Nifty closes at 10,800. The put seller pock­ets the en­tire pre­mium paid by a put buyer . But, if the Nifty ex­pires at 10,500, the seller loses ₹ 100.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.