Please note that selling a call option is not the same as buying a put. When you buy a put, you are expecting the USD to weaken. When you sell a call, you don’t expect the USD to strengthen beyond a point. You see an upside ceiling to the appreciation in the dollar and hence want to earn the premium by selling the USD-INR call option. So, be clear when you can sell a call option on the USD INR contract and what will be you payoff. Your total profit will be limited to the premium received but your losses can be unlimited on the up side once the price moves more than the premium. Check the table below:

Strike

72.00

Prem

0.40

Sell Call Option

Break Even

Below 72.40

Price

Strike

Premium

Profit/Loss

ITM/OTM

Option Value

Net Profit (Value-Prem)

68.00

72.00

0.40

-4.00

OTM

0.00

+0.40

68.50

72.00

0.40

-3.50

OTM

0.00

+0.40

69.00

72.00

0.40

-3.00

OTM

0.00

+0.40

69.50

72.00

0.40

-2.50

OTM

0.00

+0.40

70.00

72.00

0.40

-2.00

OTM

0.00

+0.40

70.50

72.00

0.40

-1.50

OTM

0.00

+0.40

71.00

72.00

0.40

-1.00

OTM

0.00

+0.40

71.50

72.00

0.40

-0.50

OTM

0.00

+0.40

72.00

72.00

0.40

-

ATM

0.00

+0.40

72.50

72.00

0.40

0.50

ITM

0.50

-0.10

73.00

72.00

0.40

1.00

ITM

1.00

-0.60

73.50

72.00

0.40

1.50

ITM

1.50

-1.10

74.00

72.00

0.40

2.00

ITM

2.00

-1.60

74.50

72.00

0.40

2.50

ITM

2.50

-2.10

75.00

72.00

0.40

3.00

ITM

3.00

-2.60

75.50

72.00

0.40

3.50

ITM

3.50

-3.10

76.00

72.00

0.40

4.00

ITM

4.00

-3.60

In the above case, we have simulated the profits and losses on the call option sold under various price levels. We can infer the following from the above table:

· The premium of Rs.0.40 is the fixed maximum profit on the contract for call seller. That is added to the strike price of Rs.72 to arrive at your break even of Rs.72.40.

· The option is out of the money (OTM) till the exchange rate reaches 72/$. Till this point the option will be worthless and the premium of Rs.0.40 will entirely be your profit.

· The option is in the money (ITM) from Rs.72 onwards. Above that level, you starting losing money as the buyer will start making the profits. Losses can be unlimited.

· Losses can be unlimited on the upside once the cost of the premium is covered and the dollar becomes stronger, your losses on the call option will keep building.

· The call option on the USD-INR is sold when you expect that the dollar will not strengthen too much or you expect the Indian rupee not to weaken too much. Either ways you can be profitable by selling a USD-INR call option.