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.
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.