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Daily MTM (Mark-to-Market) refers to the process of valuing an open position using its current or daily settlement price and recording the resulting gain or loss. However, options are not generally subject to daily MTM settlement in the same way as futures.
For an option position:
Option Buyer
Option Seller
The buyer pays the option premium when entering the trade. Changes in the option’s market price create an unrealised profit or loss while the position remains open. The profit or loss is generally realised when the option is sold, exercised, or settled according to the contract terms.
The seller receives the premium but must maintain the applicable margin for the short option position. The position is revalued as the option’s market value changes.
How is the Option Premium Settled Daily?
Generally, the premium is settled for an options trade as follows:
Option Buyer: Pays the option premium to acquire the option.
Option Seller: Receives the premium but assumes the obligations associated with the option position.
During the Position: The option’s market price can change, creating an “unrealised” profit or loss.
At Exit: The realised profit or loss depends on the entry and exit premiums, along with applicable charges.
At Expiry: The settlement depends on the type of option and the applicable exchange settlement mechanism.
An Example of Options M2M Calculation in India
Suppose an option is bought at a premium of ₹100 and later sold at ₹140. Now, the Profit per unit is ₹40 (₹140 − ₹100). If the contract has a lot size of 50, the total profit would be ₹2,000 (₹40 × 50).
Conversely, if the option is sold at ₹70, the Loss per unit is -₹30 (₹70 − ₹100), and the total loss would be ₹1,500 (₹30 × 50).
This is different from futures, where the daily settlement process credits or debits the MTM amount based on the daily settlement price.
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