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Derivatives

santhosh (CA) (636 Points)

01 December 2009

My Question is pertaining to Indian Stock Market. I have not Invested in stock Market,all i have is only theoretical Knowledge and no Practical Knowledge.

The Question:

I buy a Call option of a Stock (say Reliance) having a Strike Price of Rs 2901.i bought this option when the Option premium was Rs 150/ Option Contract. I Hold this Option till Exercise date. The option Premium keeps fluctuating Stock Price ( today its Rs 150 tom it is Rs 153 & so on. On the Exercise date assuming Reliance Stock Price is say Rs 2500/share and option Premium is Rs 163.

I will not exercise the option and will lapse it. On Lapsing i that i loose is Option premium.

What is the Option Premium i Loose Is it Rs 150 or Rs 163 ?

Pls Clarify

Thank you for the people who answer !

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3 Replies

CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 01 December 2009

I think the Option will expire at the LTP(Last Trading Price),which in this case is 163.

Though I am not very Sure,

Experts,please comment.

Kshitij Saxena (CA Final) (256 Points)
Replied 01 December 2009

Rs.150/- will be the option premium lost.

Furthermore the case assumed by you says that strike price is Rs.2901/- therefore you should not exercise the call option.

Let me give u some basic definitions:-

Call option gives you power to purchase shares at the strike price if you desire.

Put option gives you the power to sale shares at the strike price if you desire.

Strike price is the price agreed to sale/purchase shares between the option purchaser (which are you in above case) & the option seller (which is the other party in above case).

Option premium is the premium decided between option purchaser (which are you in above case) & the option seller (which is the other party in above case) on the day on which strike price is decided.

Now in your case (HYPOTHETICAL)

Value of share in market 2500

(-)Option premium paid by you 150

(-)Strike price to be paid 2901

YOUR LOSS (551)

Now in your case (ACTUAL)

Value of share in market 2500

(-)Option premium paid by you* nil

(-)Strike price to be paid 2901

YOUR LOSS 401

Since there is loss no need to exercise the option.

*The option premium is actually paid at the of making the contract therefore a sunk cost and is ignored for the purpose of either calculating profit or making the decision whether to exercise a option available to you or not.

Ramalingam K (Founder & Director - Holistic Investment Planners (P) Limited) (21077 Points)
Replied 20 May 2014

Principles and Decision-making for wealth creation

Whenever people have surplus money, they want to invest. When they invest, they just want to act or execute. They don’t want to spend time on understanding the product and various investment strategies. They would like to take investment decisions without doing any homework. There is no plan of action. Their attitude is “I have surplus money; just tell me where to invest”.