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C. Raja Rajeshwari

How to become an option writer? What is the investment required to become option writer. Is it different from that of futures requirements? — Vijaya Kumar

You can write options by instructing your broker to take a short position on options. In the case of online trading, click on the sell button for that particular contract. When you sell an option, you have written an option (taken a short position).

Suppose you have shorted one contract of Satyam Computer, which comprises 1200 underlying stock. You will have to pay a margin on this. Only the option writer is obliged to maintain a margin. It is levied based on 99 per cent value at risk over a one-day time horizon, which is intimated by the exchange to the broker.

In the case of futures, the margin requirement is the only obligation that you have to meet. However, irrespective of whether you are a buyer or a seller, initial margin is collected from you. Depending upon the movement of the underlying stock, additional margin is collected on a day-to-day basis. Your broker would collect the upfront margins from you, which is based on 99 per cent value at risk over a two-day horizon. This is because it may not be possible to collect mark-to-market settlement value (difference between the strike and the spot), before the commencement of trading on the next day.

I am holding an in-the-money call what should I do? — Eric

If you are holding an in-the-money call, it means that you are in profit. For instance, if you have a call with a strike of 150, you are in-the-money Rs 40 when the underlying stock price is Rs 190. Now, you can either exercise the call or sell the call.

On exercising, you get the difference between the strike and spot. However, on selling it, you might get more value as the directional view on the underlying (further increase) and liquidity factors add up on the intrinsic value of the call. Directional view means that if a person has a bullish view on the underlying, this person would be willing to pay more than the intrinsic value of Rs 40. So, on such occasions, you would stand to make a higher profit by selling the call.

However, sometimes if you have a deep-in-the-money option, then it may be hard to find a seller as the premiums would be steep. In such a case, you would be better off exercising the call to lock into profits.

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