Learn with ETMarkets: Role of an options seller
Who are choice merchants?
Normally in equity, HNI and extremely HNI investors and corporates — categorised as shoppers — proprietary merchants, DIIs (who can solely purchase however not write or promote) and FIIs dabble in promoting and shopping for of options. More lately retail stage buyers and merchants have jumped on to the options bandwagon. In commodity derivatives, precise customers — corporations, farmer processor organisations, and so forth, — could possibly be the sellers, whereas consumers might embrace retail merchants, or speculators, and wholesalers.
What does promoting entail?
Selling of a name or put choice on any asset class entails restricted revenue and limitless danger. The most revenue is within the kind of premium acquired from a name and put purchaser. The loss is limitless in case the market strikes in opposition to the seller.
How does loss or acquire occur?
Take the Nifty closing at Monday’s stage of 15,115.8. Assume a bullish dealer expects Nifty to hit 15,500 by expiry on Feb 11 (weekly expiry). He buys a name choice at 15,150 strike for Rs 108 a share (75 shares make one Nifty lot). If the Nifty expires this Thursday at 15,500, he’s in-the-money by Rs 350 a share. However, since he paid Rs 108 to the seller, his acquire excluding taxes and brokerage is Rs 242. That is what he will get paid by the seller. Now, assume the Nifty expires at or beneath 15,150. The choice turns into nugatory because of decay in time — a chief determinant of choice pricing — and the client forfeits the premium to the seller. The seller’s most acquire is Rs 108 a share. But most loss is limitless. While an choice purchaser’s most danger is the premium, the seller whose loss could possibly be limitless, has to position a margin to cowl the danger with the change clearing company via his dealer. The margin is the same as that for getting or promoting a Nifty futures contract.
How does a seller value an choice?
By utilizing the Black Scholes pricing mannequin, whose fundamentals might be defined within the subsequent version.
