• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C. Raja Rajeshwari

I have bought Union Bank April call at a premium of Rs 3.90. Please clarify the following doubts regarding this transaction.

1) How to exercise the option? 2) Whether I have to inform the broker, before or after the trading hours. 3) How and where the settlementtakes place. 4) When will I have the confirmation from the broker? 5) What is normal brokerage for option trading? 6) If I don't exercise the option before the expiry date and ifI am in-the-money, am I still eligible for the difference between the spot price and the strike price. — Sampath Mavnur

# You can exercise the option anytime you want, as stock options are American in nature. You have "exercise" button in your NSE trading terminal or "exercise to close" in most online trading sites. If you click the button, you could exercise your positions.

# Informing your broker before or after the trading hours would depend on your broker's policies. Many brokers would like to know about the orders to be executed the previous day itself. For instance, if you were to exercise on T day (T-day of trade execution)), then you may have to inform the broker on T-1 day.

# The clearing and settlement procedures are by National Securities Clearing Corporation Ltd (NSCCL). It takes two days after you have exercised to receive the difference between the strike and the spot, in case you are in-the-money (T + 2 days). On the day after the option has been exercised, the option writer pays in the money (T +1 days)

# You should receive confirmation from the broker about the option having been exercised the same day itself (T day).

# The maximum brokerage chargeable by your broker is fixed at 2.5 per cent of the contract value in case of futures by the NSE. In case of options, the brokerage is 2.5 per cent of the value of the contract [(Strike price + Premium) * Quantity] without any statutory levies.

# Yes, you are eligible for the gains even if you do not exercise your call as all the in-the-money calls are exercised automatically on the expiry date.

In your previous article, you had written " In options, index options can only be exercised at the end of the month but stock options can be exercised any time before the end of the month." Can a position taken in index options be closed out at any time before expiry at the end of the month or can they be squared off only at the end of the month? — Rahul Singh

A position in an index option can be closed out before the expiry date by taking the opposite position of what you already have. For instance, if you already have short positions, then taking long positions would close out your open positions. If you are in-the-money, the difference between the price at which you bought the option and the price at which you sold the option would be the profits accruing to you.

Will you please explain, "how to wind up spreads"? — Devaraj

A bull call spread is set up by buying a call with a lower strike price and selling a call with a higher strike price.

As the options near expiry:

# If the spot is below the lower strike, both the positions expire worthless.

# If the spot is between the lower and the upper strike prices, the short position on the call with the higher strike price expires worthless.

# If the stock price is above the higher strike price, then the short positions would get assigned; hence you in turn exercise the call with the lower strike price to lock into profits.

# At any time, the spread can be closed out. You can wind up such a spread by buying the call with the higher strike price and selling the call with the lower strike price (both with the same expiration month).

A bear call spread is set up by buying a call with the higher strike price and selling a call with a lower strike price. Hence, if the spot is below the lower strike, then both the positions expire worthless.

# If the spot is between the lower and the upper strike prices, the short position on the call with the lower strike price expires worthless. Exercise the call with the lower strike price for gains.

# If the stock price is above the higher strike price, the short positions would get assigned, hence you in turn exercise the call with the lower strike price to lock into profits.

# At any time, the spread can be close out by you can wind up such a spread by buying the call with the lower strike price and selling the call with the higher strike price.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
On stock option and employee stock ownership plans

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line