I have bought an option & paid the premium for it, how to settle it?

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Once you buy an option, you have following alternatives to settle the Option-

  • Squaring Off:  You can square off your position before the expiration date by selling the same Call option of the same underlying, strike price and the expiration date that you have bought. For example, if you have purchased 1 lot of Nifty 50 Call of strike price 10700 for April 26 expiry then to square off you need to sell 1 lot of Nifty 50 10700 for April 26. You will earn a premium on selling the Option. The net of premium paid when you bought Option and premium received when you sold Option will be your profit or loss.

Profit/Loss= Premium Paid-Premium Received

Some traders also choose to buy a Put option of the same underlying, strike price and expiry date to offset their losses from Call option. However, for beginners, squaring off by selling a Call option is the better alternative.

  •  Exercise the Option: Options give you right, but not the obligation, to buy or sell the underlying at a predetermined price and time. You can exercise your right and ask the seller to honor the contract. You can exercise the Option before the expiration date in case you’re holding American Option. For European Option, you can exercise the Option only on the date of expiration.
  • Allow it to expire worthless: In case, you Option is not profitable then you can also choose to allow it to expire worthless by doing nothing. Most of the Options expire worthless on the expiration date.

 Tax rates on each of these alternatives vary. So, it is advisable to understand the taxation rules before settling the Option.

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