Comment on Query of the Day

Nithin Kamath commented on 18 Sep 2013, 03:54 PM

1. What does Option writing mean? What is the difference between writing and selling?

When you are bearish on an option and sell it, we call it Option writing.

Writing and Selling are similar but not the same,
If you have bought an option and you sell it, we call it Selling
If you sell/short it first without buying expecting the price to go down, we call it writing.

2. What is the margin required for writing options? How can a client at Zerodha get to know this?

Margin required varies based on contracts, strike price and the underlying. Higher the risk, more the margin. Typically option strikes which are around the price of the underlying stock or index, tend to have same margin requirement as what is required for futures.

At Zerodha, we have a tool called SPAN calculator, where you can check the exact margin required to write an option even before you take a trade.

3. Nifty is at 5900, why is the margin for writing/shorting 5700 call higher than what is required for trading futures?

When you write/short an option, the risk is higher if the value of the premium is more and risk is lower if the value of premium is less. Since the risk is higher with a 5700 call for a person who has written an option, exchanges block more margin.

4. Nifty is at 5900, margin for writing calls reduce as the strike moves from 5900 to 6200.

True, as explained the premium on calls keep reducing as the strike price goes higher, since the premium is reducing so does the risk and hence the margin requirement also reduces.

5. Nifty is at 5900, margin for writing puts increase as the strikes moves from 5900 to 5700.

False, when the strike price goes lower, the value of the puts reduces and hence the margins will also reduce and not increase as mentioned.

View the full comment thread »