Option trading clarification..

Hi All,
I am trying to understand about how to trade in options.. I have a query regarding this.. Please let me know if you know the answer..

Lets take an example..
I buy a XYZ compnay's 100CE option (1 lot of 1000 shares) at a premium of Rs. 5... Lets assume that the current trading price of the XYZ is Rs. 90/-...

Upon XYZ's current stock price reaching Rs. 100/- before expiry, if I sell the 100CE option (same 1 lot of 1000 shares) which will be at a premium of Rs. 10/-, will I be making any profit?...

Is there any significance in the rise of the premium price when I buy (Rs. 5 in the above example) to the premium price when I see (Rs. 10/-)...

 

Hi VISHWANATHA

You will get profit only when the strike price move above 100 Rs within short period . Because the premium has time decay factor in it which will eat your profit.

Suppose , as you said ,If there is significance rise in your price as you said , then you have check the brokerage + taxes etc . Deduct that from your total profit and calculate net profit.

1000 X 5 = 5000 Rs your initial investment
1000*10 = 10000 Rs your profit
Net profit = 10000-5000=5000
Brokerage say =500
Taxes say = 150

Say miscellaneous expenses = 200
Net profit = 10000-(5000+850)=4150 rs

% Return = 4150/5000 = 83%

Remember if things happen against you expectation then there is a chance to loose all you 5000 Rs + Brokerage

Therefore its too risky to trade in options in large quantity.

Thanks

Rajesh