Vik M
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How is Profit & Loss calculated in Option writing?

Vik M at 04:00 PM - Dec 07, 2015 ( ) Views: 736

1 1

Evening Gentlemen and of-course Ladies,

The thread caption is my question – How do we calculate PnL (Profit and loss) in options trading?

Can some experts shed light as to how this works? Where would be the break even?

I will cite an example

  • - Selling SBI 240 CE @ 6.7
  • - Quantity 2000
  • - CMP 238.9

Margin Required

  • -Span : Rs: 53,300
  • -Exposure margin : Rs: 23,865
  • -Premium receivable : Rs: 15,300
  • -Total margin : Rs: 77,165

* Considering flat brokerage of 40 rupees for buy and sell

* Lets leave STT & other taxes out of the equation

* Lets say its a bearish market? What would be my profit and loss if option premium moves to 0.5 , 1, 2, 3, 4, 5, 6. Breakeven point?

-------------- 

Have tried understanding this concept but not able to find the pulse as to where should I be cutting the trade if things go wrong - In other words how can I effectly calculate my losses and profits.

Any contribution to understand this subject would be highly appreciated ~ Thanks

 



From: Vik M at 04:02 PM - Dec 07, 2015( )


===========================

I have seen some masters over here to call out some names Durai/Deepak are the ones whose thread I came across


(1 to 19 out of 19) - Latest Replies on Top | First | << Previous | Next >> | Last |
Pc Rav at 05:27 PM - Dec 07, 2015 ( )

Yours welcome

Vik M at 05:25 PM - Dec 07, 2015 ( )

Thanks for sharing your wisdom, much appreciated. Cant thank you more :) 

Vimal 

Pc Rav at 05:19 PM - Dec 07, 2015 ( )

Yes i am a option writer, my profits are very less like 3-5% pm on my investment,  but consistant. I do only in nifty.

Vik M at 05:14 PM - Dec 07, 2015 ( )

You write options by any chance?

PC thanks for sharing knowledge - Much appreciated 

Vik M at 05:12 PM - Dec 07, 2015 ( )

I will do that - Thank you for keeping it simple. Been running in circles to understand this concept. Now that we chatted over it makes some sense as to how zero premiums are being worked out in favor of option writers. Its not easy as it seems but good to know stuff.

88% of the folks burn fingers in buying option calls [me included] - selling option is a better bet most of the times as many say - wanted to unearth why do they quote so.

Let me paper trade how these equations tally  

Pc Rav at 05:10 PM - Dec 07, 2015 ( )

I mean paper trading.

Pc Rav at 05:07 PM - Dec 07, 2015 ( )

Yes you are right, you do one thing, you write different strikes of different options of stocks and index and update every day closing price of spot and option till expiry, you can understand easyly.

Vik M at 05:06 PM - Dec 07, 2015 ( )

Wanted to try option writing once, but never had the marbles to do it

[A] - because it involves fair amount of margin

[B] - Never understood how to go about calculating the  break even and profit points

Vik M at 05:05 PM - Dec 07, 2015 ( )

Ahh.. so fudamentally it will be tied to the spot price irrespective of expiry -- that makes sense. I will be keeping an eye this expiry - one of the reasons why call writers opt for index or stock strike price a little further from the spot price as during expiry it will get to ZERO

Am I correct - PC 

Pc Rav at 05:02 PM - Dec 07, 2015 ( )

Expiry closing price of any options like this,

If it is call SPOT PRICE -- STRIKE PRICE

If it is put STRIKE PRICE -- SPOT PRICE

dont feel shy or silly, you can ask again if you not understand any part, i will try to tell what i know.

Vik M at 05:02 PM - Dec 07, 2015 ( )

I understood breakeven , but wondering whats happens when time premium erosion gets triggered - Thanks

Pc Rav at 04:56 PM - Dec 07, 2015 ( )

Still you are not understand the break even point, If SBI spot close at 248 on expiry, your 240ce price close price will be Rs.8 [so no question of if price close at 0.1], so in this case you should buy back or you can leave the call to market, your loss is 6.70-8=-1.3 X 2000 = -2600/-

Ashish Manchanda at 04:55 PM - Dec 07, 2015 ( )

Hi

It would be better if someone posts a detailted view on option writing.  It would be very informative for many readers.

 

Thanks

Vik M at 04:51 PM - Dec 07, 2015 ( )

Thanks for the inputs thusfar. One last question we have seen premiums eroding during the expiry week most of them end @.1 or .05

Basis the above example lets say SBI 240 CE ends up @ .1 whereas the spot price is at 248 how should I be calculating my profit? On the basis of premium of spot price?

Silly question may be -- but curious have seen this happening

Pc Rav at 04:36 PM - Dec 07, 2015 ( )

Yes, we should focus on spot prices only, of course some times premiums mismatch at event times, result times, expectations on some news. You can check fair value of premium with some calculators avilable on web.

Vik M at 04:31 PM - Dec 07, 2015 ( )

Or plainly put since option price is corelated to spot prices its linked directly to option premium

Vik M at 04:29 PM - Dec 07, 2015 ( )

Thanks PC - I took the privilege of calling you as PC.

Does that mean it has not thing to do with the option price movements?

 

Pc Rav at 04:19 PM - Dec 07, 2015 ( )

Profit and loss caluculation is, max profit in any option writing is the prem recived by writing option X lot size, in your sbi case max profit is 6.7 X 2000=13400. Now loss part above your break even point [246.7] you loose 2000rs for each one point close above your break even. This is all expiry closing basis calculation.

Pc Rav at 04:11 PM - Dec 07, 2015 ( )

I am not going to touch in to entry and exit, because if you are willing to write any option you may have some plan for entry and exit too either profit or loss.

Now I will try to give simple view on break even, for call writing break even is Strike Price + prem recieved on call writing [in your sbi case 240+6.7=246.7 is break even brokarage n tax charges extra], so if sbi expiry at 246.7 you loss only expenditure part.

If you write put your break even is strike price-prem recived on put writing.

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