iCharts Discussions

[rk_a2003]

Hi All,

I want to share my experience and seek clarifications on some points. Some couple of years back Me and my friend entered in to Powergrid futures long position for the next month. After some time as expected the price went up, we entered at around 108 and price reached around 110 or so. The 110 call of current month was at good premium of 2 + even though expiry is very few day’s away. We thought that it’s a good way to lock the profits( even if scrip go down temporarily) and sold (wrote) 110 call option of current month.

We were thinking that we locked in the profits by acting like this, till our myths are shattered to pieces by market operators.

The same day just few seconds before the closing of the market the cash price of powergrid soared to 116 levels for a fraction of seconds and came back settled at original price.

The next day my friend telephoned me and asked whether my sold call is intact or covered.I said I have not covered and how can it will be covered .He said his call was covered, when I checked… my call was also covered around 115 price with a loss of 2+.

After this the cash price started going down. And went well below 108.With a shock both of us covered our future positions also swallowing the losses. My friend is having a 10 years + experience in stock market though I am relatively new to the market. He said he too don’t have a clue about what happened.

When we asked our broker they said the call option was exercised by the buyer and executed by the exchange.

Well, whenever I see recommendations of experts to write call or put as hedging/enhancing profit against future position I always laugh. How many foresee this type of pitfalls in advance. Why this option exercising is kept open? They could have made it just like in nifty in which it can be exercised only on expiry date.

My another question is say if in above case I hold Powergrid equity of the same quantity in my account; Would it be any different? .

My question is today if I have 2000 powergrid delivered share holdings in my account and I write a 120 call at some premium. If buyer exercises his call what will happen? .Will the same thing happen to me as earlier or else will the exchange take all my 2000 shares at 120? .

[doctorshah]

dear rk
it has to do with American and European option. Previously stock options were of American type which can be exercised any time and nifty options were of European type which can be exercised at the end of the month. Now I think all options are of European type so can be exercised only at the month end.

[svkum]

Dear RK,
Exersizing is generally aoccur , if it happens, by or near the expiry period.
This can happan prematurely , in case the options traded for the scrips ar illiquid.
so one has to ensure that options need to be very liquid and having good volumes .
whenever hedging strategy is bing adopted with covered call , its done with OTM options , if 108 fut is bought , then 115, 120 c of the same month options cd have sold.

[aditya_thukral]

It was sad that it happened to you RK. But there might be some points which you should consider like :

Whether POWERGRID futures were in ban. If that is so your broker would have squared off the position to avoid you from penalty.

If thats the expiry day then your broker is saying right. As the investor who has long in-the-money options on the expiry date will receive the exercise settlement value per unit of the option from the investor who is short on the option. The seller is compulsorily has to cover his shorts.

The only thing is the exchange have mechanisms like that only. The exchange super computer is built to make losses to people. All this is chor bazaari.

[rk_a2003]

Thank you all doctorshah,svkum &aditya_thukral,

So,now all are in european mode then any option can be excercised only on the day of expiry.

In my case the option was excercised well before the day of expiry(In American mode).The options were exercised just before closing of the market thats why the exchange bought the physical shares at what ever prices quoted propably those quotes at higher prices are from the same operator who excercised the options.,That's why the cash prices soared up to 116 from 110 with in split second.


It's a well laid trap in to which i fell out of ignorance.

[rk_a2003]

"My question is today if I have 2000 powergrid delivered share holdings in my account and I write a 120 call at some premium. If buyer exercises his call what will happen? .Will the same thing happen to me as earlier or else will the exchange take all my 2000 shares at 120?."

I extend above question ....If i have not squared off my 120 call even on expiry date.At the last minute 120 call being excercised by the buyer and due to the execution of the same by the exchange if prices soared up to 130.In such case whether exchange take my 2000 shares lying in my account at the rate of 120 or will they purchase them at market rates at the time of call excercise and deduct the loss/price diference from my account ?what will happen?

.....Please answer!

I will further elaborate this case. In many books we have studied that if you have shareholdings equivalent to future lot (say in case of power grid 2000) you can sell OTM calls and eat the premium regularly.

If call buyer exercised his call option and because of the execution of the same by the exchange the price soared up to 130 for a moment. If the shares lying in your account are taken by Exchange@120 you don’t lose anything or else if they buy it at prevailing market rates at the time of call exercising i.e. around 130 and credit the losses in to your account. You will be a double looser your call option will bring losses and your 2000 shares will be lying idle in your account and you cannot sell them at 130 next day as the soaring up of price is split second phenomena .Now the market price is again at around 120.

[SwingTrader]

rk,

What happened last time will again repeat if you trade a short call against delivered shares. The underlying for the call is the stock futures contract and not the cash shares itself. Your shares will not be touched.

Covered call strategy can't be traded in the Indian market like they describe in the options books out there. In US markets the underlying are the cash shares itself so if short option is exercised then the shares one is holding are "called away" at the short call strike price and things all work out like planned.

Our markets are different. You will have to sell a powergrid call against a long powergrid futures contract you are holding, only then it will work like you have planned.

[rk_a2003]

ST

Thanks for the clarification.