Dear All I have a problem on how to find Variation Margin on Short Position in Call Option. I feel that in this derivative contract loss is unlimited and only gain is of receipt of option premium. In my opinion solution given for IAI April 16 CT2 exam for Que 13 case c is wrong. It should be loss rather than profit. Please advice. Thanks in Advance
Here, I have short position in the options. That is I'm the seller. Strike price is given to be 1100. Now since the price goes up to 1150, the risk I'm exposed to is that the opposite party may not turn up for the offer (as he has a right not an obligation), so I will recieve margin to adjust for the risk.
Since the price increase to be 1150 countryparty will accept the call option for the strike price and we have to pay the variation margin of 35000. So there will be loss not the gain as given in the solution.
My reading of the question is that if the price moves to 1150, the buyer will exercise the option against the seller (ie will choose to pay 1100 for the asset now worth 1150), so Mr Aarhan will make a loss, thus he would be required to pay margin.
Thanks Simon Sir for your kind reply. So basically the solution need to be corrected to show the loss.
In practice, the situation is more complicated due to the initial margin requirement (not mentioned in the question) and the treatment of the option premium, which may be applied against the margin requirement (mentioned in the question but not used in the solution?)
