Comment on Theta

Saurabh commented on 10 Jul 2015, 01:38 PM

Karthik my question is:

Say I am an option seller (S1) who sells 1 contract of an OTM CE for 90 to an option buyer (B1). Three days later the option is still OTM and the premium drops to 80. Now If I square off my position. This means I am essentially closing the trade and transferring the risk of selling the option to somebody else (S2) with a profit of Rs.10. Let us say the person who bought the contract (B1) for 90 still holds it:

In this case:

1. S1 initially received Rs.90 from B1
2. Three days later S1 closed the position and the contract was automatically transferred to S2 for a premium of Rs.80

Now say the option becomes ITM and costs Rs. 120 on day 4 and buyer B1 closes his position and the contract gets transferred to B2.

In such cases where people square off on the basis of premium changes – who is the final owner and which seller finally pays if the premium rises? Would S1 be involved or would S2 pay for the premium rise from 80 to 120 to B1?

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