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C. Raja Rajeshwari

What type of positions, long or short or both can be exercised?

A short position would mean that you are on the sell side and a long position is on the buy side. Only long in-the-money or at-the-money positions are exercised.

# Short position cannot be exercised as a seller or writer of option; you have the obligation and not the right. The buyer always has the right to exercise. Hence, only long positions have the right of exercise.

# In-the-money means that the spot price is greater than the strike price for a call and the strike price is greater than the spot price for a put. When you are the in-the-money, it means that on exercising your position you would make profits.

# Out-of-the-money positions are never exercised, in cash settlement, as is the case in India. In the case of physical settlement, there are chances of the options being exercised to book losses for tax accounting reasons.

Is there any limit to the number of exercised calls assigned to one investor at any one time and or in any given period?

The limit to which one can be assigned is to the extent of the open positions (a position that has not been squared) one holds. For instance, you have short position on two Tata Steel calls, then only two calls can be assigned to you, not more than that.

# You have to take into consideration that the stock options are American options and can be exercised any time. Therefore, from the time you have taken the short position to the time of expiry, you can anticipate the assignment of the options to you.

# This assignment can be in parts too. If you have a short position in two Tata Steel calls, you can assign one call on one day and another call on expiry.

# In the case of index options, which are European in nature, the assignment can only be at the time of expiry of the options. Hence, on the expiry day, all the long positions are netted and assigned to the open short position.

How the exercised calls are assigned to individual investor and who assigns it (NSE or the broker). Does the assignment of exercised calls subject to brokerage?

The NSCCL - National Securities Clearing Corporation, assigns the exercised option to open short positions. Settlement is effected for long positions, which are either at-the-money, or in-the-money options, and are matched with short positions, on a random basis. Options, which have been exercised, are assigned and allocated at the client level, directly to the person who has taken the position.

No, the assignment of exercised call is not subject to brokerage.

How can you make money with out-of-money options?

You make money from selling options as you get to pocket the premium. However, you run the risk of being assigned in case of the options turning in-the-money.

When you are very bullish on an underlying stock, then sell out-of-the-money puts. If you get the wrong direction of the stock movement, then this rule could back fire on you. In case, the underlying stock falls as expected before expiry, the call expires worthless. On the other hand, the underlying stock rises in tune with your bullish outlook, then the put expires worthless.

What is T+ 2 trading? Is it necessary to square in the same day or can it be squared up in the next day?

T+2 trading is the settlement cycle in a rolling settlement. This means that the trades placed on the T-day would come for settlement on the second day from T-day.

For instance, if you bought a share on Monday (T day), the confirmation and the delivery notice would be on Tuesday (T+1 day) and the delivery and payment is effected on the (T+2 day).

If you short sold any stock, you have to square it up on the same day. In case you have bought a stock you can square it up the next day (T+1 day), but this would depend upon the policy followed by your broker.

(Queries are from J.D. Singel, Gopal, Srivastava)

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