I am first time going to buy Option; however, I do not understand how to square off or exercise them. Please answer some of my queries for the benefit of me and the other beginners. Here are my questions.

1.) Upon buying does the contract get reflected in our demat or trading account since they are not physically delivered like in America?

2.) What one has to do to exercise his puts or calls contract? Or will they get exercised automatically on last Thursday of the month as we now only have European styled Options? **Option exercising confuses lots of people especially beginners so lucid and detail answer would be more helpful.


3.) Suppose I buy 1 call contract of Jet Airways at 500 as strike price and paid Rs. 10 premium for it. The lot size of Jet has 500 shares. So I end up paying 500*10 = 5000 Rs. as total premium, correct? Now my break even point should be 510 (500 + 10 as premium). If the Jet's stock on Thursday ends at 515 Rs. What would be my profit? Please tell me how to calculate it.

4.) Since the contracts are cash settled, will the profit come automatically in my bank account?

Thanks and regards

1. The option will get reflected in your trading account, but not in your demat account.

2. The procedure to exercise the option depends on your broker. If you have an online trading account, it is possible that your broker allows you to exercise the option via his trading site / trading terminal.

In case of some brokers, clients have to call the broker to exercise the option.

If you buy an option and you don't exercise it, the position will be automatically settled on expiry by the exchange.

If the option is "in the money", the exchange will credit the profit to your account.

3. Profit = Selling Price - Cost Price.

Your cost = Rs 10 X 500 = Rs 5000.
Your sale value = Rs 15 X 500 = Rs 7500.

Your profit = Rs 7500 - Rs 5000 = Rs 2500.

Also, you have to deduct various charges and taxes from your profit.

4. The profit will be credited to your trading account. You can then withdraw it to your bank account and wait till the broker credits it.

__________________
Read All Rules Before Making Any Post | E-Investing on Google+

Many many thanks Alchemist for replying to my post. You are such a gentleman. I see in many other threads you help so many individuals generously with your very well-informed and lucid reply. Thanks once again.

First of all I am new to trading.

In the above example I have 1 doubt, if Current value of stock is not 515 & let say it is 505. Ok I will not be in profit but can I square off the position? means my question is whether spot price should be greater than only strike price or it should be greater than (strike price + Premium) for square off the position on any date before expiry in case of stock options?

If on the settlement day, price of share is 505 then exchange will automatically credit 5 x 500 = 2500 to your account. In this case, your loss will be 2500 as you have paid a premium of 5000 at the start.

Exchange will give you money if share price is more than strike (not strike + premium).

If price is same as strike + premium then you break even. If it is less than strike + premium but more than strike, you get some of your premium back but you make some loss.

In worst case, if price is less than strike, you lose entire premium and you get nothing...

Thanks. but I have 1 problem now.

Suppose I had taken Reliance call 800 at 26 (1 lot of size 250) when spot price of reliance is 814. Then I had sell my call option on same day at 31 (strike price =800) and at that time spot price of reliance is 822. Can I get profit? & how much. Forget the brokerage & taxes for time being. My breakeven is at 826 so what is the loss or profit & how is calculated?

Thanks & Regards

If you buy a lot at 26 (26 x 250 = 6500 Rs) and sell it at 31 (31 x 250 = 7750 Rs) your total profit is 1250 Rs (5 x 250 = 1250 Rs).

This is assuming you have squared off the position or you have closed the earlier bought call position (and not sold a new option of the same strike). Spot price does not affect your gains here.