Comment on Basics on Options Shorting/Writing

Nithin Kamath commented on 27 Jul 2014, 02:35 PM

Assume you shorted 7500 puts @Rs 50 on Nifty and Nifty tanked to 7000. Assume now that the liquidity in this contract becomes zero (i.e no buyers or sellers), remember that if stock/index falls, put value will increase it will never become zero. The buyer of this option is seeing a lot of money ( 50 has become 5000) but he can’t exit it as there are no buyers on this contract.
First thing you need to understand is that in India all options are settled in cash. So as a person shorting option contracts, you never have to worry about either taking delivery or giving delivery of stock if assigned. If you are assigned, you have to pay the buyer of the option difference in money from the strike to the current closing price.
Also all options in India today are european, what this means is that the buyer can exercise this option only on the last day of expiry.
So in the above example, if on the last thursday Nifty closes at 7000, you as a person who has shorted 7500 puts is compulsorily assigned, and you have to pay back 500 to the person who has bought the option ( net loss of 450 = 500 – 50).

Hopefully clarifies

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