Course Name Options Trading Strategies In Python:Basic, Section No:4, Unit No:1,Unit type:Video
Why Call/Put option is sold?
What happens if the the underlying Value is 960 on the date of expiration and someone has sold the call option at strike price of 940 by collecting premium of Rs 10.?
From whom he has collected the premium and if he has collected the premium is he entitled to do the trade if the premium giver wants to execute the trade?
Hi,
If underlying = 960, then it means the call option of strike price 940 is in the money (ITM).
We are assuming that the premium was Rs. 10 for the call options.
Let's see what happens from call option buyer's (or premium giver) point of view.
Call option buyer paid Rs. 10 premium for option with strike price of 940.
As option is in the money, he can exercise this option. He will get 10rs. profit. (940 + 10 =950, for an underlying which is priced at 960 now.
Now the option seller (person who sold the option and received premium from option buyer) is obligated to accept the option buyer's demand.
He had taken a premium of 10. But since he has to sell the underlying at 940 to option buyer, he has to take a loss. (Buy at 960 from market, and sell at 940 to option buyer. 20 rs loss. But he had taken a premium of Rs 10, so 20 -10 = 10 rs total loss).
An option seller has to compulsorily honour the option buyer's demand.
Hope this helps.