Comment on Basics on Options Shorting/Writing

Amit Nanda commented on 05 Aug 2015, 04:25 PM

Just to clarify if I have understood correctly:

Nifty is trading at 8575 on 5-Aug.

1. I short 1 lot of Nifty Call option of strike price 9000 at ₹ 6.80. It is highly unlikely that Nifty will reach by end of expiry in August; hence this option will expire worthless. Therefore I would gain 6.8 x 25 (1 lot) = 170. Is this understanding correct? Since it is a highly unlikely scenario of Nifty hitting 9000 in this expiry, it is a relatively much less riskier trade to take. Right?

2. I short 1 lot of Nifty Call at 132.5 and 1 lot at 89.8 just before close of trade on 5-Aug – both at the same strike of 8550 (nearest strike). The combined premium is 222.3. Due to time decay, the “combined” premium of Call & Put options should decrease by end of next trading day (say 215). Of-course the premium of Call and Put options may increase or decrease individually depending on the direction of Nifty movement, however the combined premium should decrease (due to time decay) assuming that volatility remains fairly stable. By end of next trading day (that is on 6-Aug), I can square-off my position and gain 7.3 (222.3 – 215) x 50 (1 lot for Call + 1 lot for Put) = ₹360. Is this understanding correct? Since there is almost always enough volatility in Nifty, I should be able to square-off my position easily and not worry about liquidity. Unless the volatility increases significantly in 1 day, there is a high probability of gaining in this scenario. Right?

Could you please confirm if I have understood shorting of options correctly in the above 2 scenarios?

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