5th May 2012, 05:46 PM
Join Date: Feb 2008
Rep Power: 42
Understanding Options with Examples
With stock options I have a few general queries
1. Say I have a buy option or call option, I don't have to wait until maturity but can exercise it any time before the expiry date if it is above strike price, I am sure this is the case. Am I right?
2. I am confused, what is the difference between exercising the option and selling the option? If I have a call option, I understand if it is above the strike price I can exercise it, but can i sell it? What does it mean?
3. Does CE refers to call option and PE refers to put option?
Also to be a writer of option (the one who does not exercise option) does one choose sell option in HDFC while placing an order?
4. Looking at a practical example as per prices of Friday
Dabur India which has a market lot of 2000.
Say I go for a call option for the expiry 31 May.
The strike price is 110
The option price is showing as 2.80 for call option, strike price of 110
So if I am not mistaken the premium I would have to pay is 2.80*2000 = 5600.
Now as far as I understand dabur should reach at least 113 .i.e. 3*2000=6000 before end of may for me to exercise the option and be in profit.
6000-5600= 400 profit approx
Say again with dabur I buy a put option for strike price of 90.
The price is showing 1.35 so the premium is 1.35*2000=2700.
and dabur should fall to 88 for me again to be in profit, i.e 2*2000=4000
4000-2700= 1300 profit approx.
Is this right? Is this how options trading work?
Last edited by Newby : 5th May 2012 at 06:28 PM.