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KembaraXtra – Islamic Derivatives: Where Does the Money Come From in Option Cash Settlement?
🔹 Short Answer
👉 In options, the money comes mainly from the option seller (writer)
👉 And it is secured using margin (from the seller)
🔹 Connect It With Your Idea
You said:
“In futures, margin is used to pay profit”
✔ Correct ✅
👉 In options:
🔹 How Money Flows in Options
🔸 Step 1: Premium Is Paid
👉 This is NOT used to pay profit later
(It’s just a fee)
🔸 Step 2: Seller Provides Margin
🔸 Step 3: Cash Settlement Happens
If option is profitable:
👉 Example (Call Option):
👉 Buyer must receive RM500
🔹 Where Does RM500 Come From?
👉 From the seller’s margin account
✔ Same concept as futures, but:
🔹 Why Only Seller Pays?
Because:
👉 So:
👉 Profit is always paid from the losing side’s margin
🔹 Simple Summary
🔹 Final Insight (Very Important)
👉 In both futures and options:
✔ Profit always comes from the losing party
✔ Margin ensures the money is available and guaranteed
🔹 Short Answer
👉 In options, the money comes mainly from the option seller (writer)
👉 And it is secured using margin (from the seller)
🔹 Connect It With Your Idea
You said:
“In futures, margin is used to pay profit”
✔ Correct ✅
👉 In options:
- There is no mutual margin like futures
- But the seller must deposit margin
🔹 How Money Flows in Options
🔸 Step 1: Premium Is Paid
- Buyer pays premium (e.g., RM50)
- Seller receives it
👉 This is NOT used to pay profit later
(It’s just a fee)
🔸 Step 2: Seller Provides Margin
- Seller deposits margin with clearing house
- This acts like a guarantee fund
🔸 Step 3: Cash Settlement Happens
If option is profitable:
👉 Example (Call Option):
- Strike = RM4,000
- Market = RM4,500
- Difference = RM500
👉 Buyer must receive RM500
🔹 Where Does RM500 Come From?
👉 From the seller’s margin account
- Clearing house deducts RM500 from seller
- Pays it to buyer
✔ Same concept as futures, but:
- Only seller funds the risk
🔹 Why Only Seller Pays?
Because:
- Buyer → has right only
- Seller → has obligation
👉 So:
- Seller must be financially prepared
- Margin ensures they can pay
- Futures → both sides put deposit
- Options → only seller puts deposit
👉 Profit is always paid from the losing side’s margin
🔹 Simple Summary
- Futures:
- Margin from both parties pays profit
- Options:
- Profit comes from seller’s margin
- Premium is just a fee, not profit source
🔹 Final Insight (Very Important)
👉 In both futures and options:
✔ Profit always comes from the losing party
✔ Margin ensures the money is available and guaranteed
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