Wednesday, March 2, 2011

Options Trading In India - Risks Involved

What are the risks involved for an options buyer?
The risk/ loss of an option buyer is limited to the premium that he has paid.

What are the risks for an Option writer?
The risk of an Options Writer is unlimited where his gains are limited to the Premiums earned. When a physical delivery uncovered call is exercised upon, the writer will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call.

The writer of a put option bears a risk of loss if the value of the underlying asset declines below the exercise price. The writer of a put bears the risk of a decline in the price of the underlying asset potentially to zero.

How can an option writer take care of his risk?
Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset thereby assuming a spread position or by acquiring other types of hedging positions in the options/ futures and other correlated markets.

Who can write options in Indian derivatives market?
In the Indian Derivatives market, SEBI has not created any particular category of options writers. Any market participant can write options. However, margin requirements are stringent for options writers.

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