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Derivatives Exercising Options

santhosh (CA) (636 Points)

15 December 2009

In Indian Derivative Markets,Is it possible to buy or Sell Shares by Exercising Calls or Puts?
Is all options at the Expiry Date settled by Price Differences only?

For example : If i hold a Infy Call having a Strike price of Rs 2130/-. On the expiry date assuming closing Price of Infy is Rs 2150. If i Exercise the option.
Will my account get Credited with Rs 20/ or Can i choose to buy an Infosys Share at Rs 2130.

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11 Replies

Krunal Raichura (Financial Advisory) (2134 Points)
Replied 15 December 2009

In India, we follow a cash settlement system, therefore settlement of all futures and options contracts is done on the basis of price differences only.

In your example, your account will get credited by Rs. 20 towards final settlement.

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CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 15 December 2009

Hey Krunal,wat will be setllement in above case if the closing price of share is less than Call's strike price,say Rs.2110 ?

santhosh (CA) (636 Points)
Replied 15 December 2009

Hi there In My example if the Stock price is less than strike price.The buyer of option i.e me will lapse the option.My Net payoff is Negative.The amount i loose is the premium i paid for the option.But seller or Writer of the option Gains in this situation

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Krunal Raichura (Financial Advisory) (2134 Points)
Replied 16 December 2009

Dear Himanshu,

Santosh has explained it currently.

To explain it in detail, we would go back to basics. The call option gives the buyer, the right but not the obligaation to buy the underlying at a pre-determined price (strike price). In the above example, the buyer has the right, but not the obligation to buy Infosys share at 2130. He would excercise his right to buy at 2130 if and only if the price is above 2130. If it is below it, then he would rather buy it from open market and not excercise his right.

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CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 18 December 2009

ok,Thanks Santosh & Krunal..[:)]

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CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 18 December 2009

Hi,

One more thing I want to know.Is the settlement same in the case of Nifty options ?

Eg. 1 .Suppose I am Holding 1 lot(50 units) of Nifty 5000 CE .& Nifty closes on 5050(Expiry).

So,will I be credited by 50 * 50 = 2500 ?

Eg. 2. Suppose I am holding 1 lot(50 units) of Nifty 5000 PE.& Nifty closes on 4950(Expiry).

So,will I be credited by 50 * 50 = 2500 ?

Thanks.

Krunal Raichura (Financial Advisory) (2134 Points)
Replied 19 December 2009

Yes...the settlement will be in the manner you have mentioned.

santhosh (CA) (636 Points)
Replied 19 December 2009

Yes Krunal is Correct.

CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 25 December 2009

one more query..

In my example of Nifty option CE 5000,closing is 5050, I will be credited by 50 * 50 =2500..

Who will pay this sum to me ? & Am I credited with that sum only when I dont sqare off/selll my position till the last moment ?

Krunal Raichura (Financial Advisory) (2134 Points)
Replied 25 December 2009

The sum will be paid by the clearing house which is an intermediary between you and the guy who sold you the option, so its the guy who sold u the rights to buy nifty @ 5000 who will have to pay you the price difference.

You will be credited with that amount only if you have not squared off the position, because settlemet on closing day is only for outstanding positions. Those who have squared off the position are no more a party to the contract and thus have settled their contract by giving their rights to some other party.

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CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 26 December 2009

Got it..thanks again..