Module 5   Options Theory for Professional TradingChapter 24

Quick note on Physical Settlement

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24.1 – Overview

Until recent times, trading in equity futures and options was cash settled in India. What this means is that upon expiry of the contract, buyers or sellers had to settle their position in cash without having to take delivery of the underlying security. On April 11, 2018, SEBI released a circular making physical delivery of stocks for all stock F&O contracts mandatory in a phased manner. The aim was to curb excessive speculation which would result in too much volatility in individual stocks.

24.2 What is Physical Settlement? 

It means all stock F&O contracts at expiry, are required to be given/taken delivery of the underlying security. From October 2019’s expiry, all stock F&O contracts are compulsorily settled physically. 

Let’s understand this with an example, before the introduction of physical settlement, if you bought only a lot of SBI futures expiring this month, on expiry, the contract will be cash-settled based on the settlement price and you will receive the credit or debit in your trading account. We’ve explained how marked to market settlement works in this chapter. But with the physical settlement, if you don’t close or rollover your position till expiry, you are required to pay the total contract value and you will receive the delivery of shares to your Demat account.

24.3 Why is Physical Settlement enforced?

When the contract is cash-settled, traders only are required to maintain the margin(SPAN +Exposure) for the contract and can lead to short-sellers building up excessive short positions closer to expiry artificially bringing down the price. With the physical settlement, these traders will have to buy the stock from the equity market or borrow on the SLB markets to be able to deliver the stocks to the counterparty. This brings in balance to the price not allowing for price manipulation.

24.4 How are positions settled?

On expiry, various F&O contracts are settled in the following manner

  1. Take Delivery(stocks are delivered to your Demat account)- Long Futures, long ITM Call and short ITM Put
  2. Give Delivery(you are required to deliver the stocks to the exchange)- Short Futures, short ITM Call and long ITM Put. 

Only ITM options will be physically settled, if the option expires OTM, they expire worthlessly and there won’t be any delivery obligation. 

24.5 Netted off positions(subcategory)

If you have multiple positions of the same underlying for the same expiration date and they form a hedge, depending on the direction of the trade, they will be netted off.

1st Leg 2nd Leg
Long Futures Short ITM Call

Long ITM Put

Short Futures Long ITM Call

Short ITM Put

Long ITM Call Long ITM Put

Short ITM Call

Long ITM Put Long ITM Call

Short ITM Put

Short ITM Call Long ITM Call

Short ITM Put

Short ITM Put Short ITM Call

Long ITM Put

For example, if you have an SBI June long futures contract and long ITM Put of strike 200(SBI spot price at Rs 180), the long futures position will lead to a take delivery obligation and the long put option to a given delivery obligation. This will be netted off for your account and there won’t be any physical delivery obligation.

24.6 Margins

When you are trading in the F&O segment, for futures and short options, you will require to maintain only the margin amount in your account, for long options, just the premium required to buy. However, this changes with the physical settlement mechanism, where you are required to bring in 100% of the contract value to take delivery of the contract or bring in stocks to give delivery(depending on the direction of your trade). Brokers introduce additional margins when such positions get closer to expiry. 

You can read on Zerodha’s physical settlement policy here.

111 comments

  1. Yuvraj says:

    Hello sir,

    If I don’t hold any shares in my account and can I sell put options in order to buy at lower price?

    Regards,
    Yuvraj

  2. Nitish Kumar says:

    Hi sir.
    in order to not get in a position to become liable for physical delivery one should square off the position latest by the 1st half of the expiry ? i trade mostly through covered call in nifty companies and premium decay mostly happen on the last two days very fastly.
    Your insight on this point sir.

    • Karthik Rangappa says:

      You can keep the position open till the first Monday of the expiry week, Nithish. From the first Monday, the margins go up because of the physical delivery.

  3. Srikanth K V says:

    Hi Karthik,

    I am a newbie to options,
    1)I would like to know what is the starting day of the new option(call/put) .
    Example : I could see INFYCEXXXX EXPIRING ON 30TH AUG (on which day it was it added to option chain).

    2) physical settelement is enforced on when trader failed to squareoff his position before the expiry of the contract(thrusday/last thursday), please clarify the same.

    • Karthik Rangappa says:

      The Aug contract will be introduced at the beginning of May. In June, May contract would cease to exist and Sept would be introduced.

  4. Dalip Vachani says:

    Hi Sir,
    I am new to options trade. Suppose I sell call option of SBI with a strike price of Rs. 200/- and I don’t square off the position.If the option is in the money on expiry date July 30, 2020 and SBI stock closes at Rs. 210/- will I have to give delivery of 3000 shares of SBI or intrinsic value of Rs. 10(210-200)*3000= 30000/- will be debited to my account.

  5. HITENDRA PANDYA says:

    1.If I keep sell position for CE/PE For Index till expiry, so there is also margin will be increase from last week of monday Or this is applicable only for Stocks
    2..If I keep sell position for CE/PE For Stock till expiry, so there is how much margin will be increase from last week of monday i.e.MON/TUE/WED

  6. Sriram Ramanathan says:

    Question 1
    I have placed a Long call on Nifty Jul 11000 CE by paying a premium of 110 per lot (75). 8250 has been deducted as premium.
    On 30th July, Nifty closes at 11300 and I let my option to expire ITM. With cash settlement earlier, without me doing anything, I think I would be getting 22,500 (300*75) in my account. With this new mandate of physical settlement, do I have to still buy the 75 shares @ 11000 per share, which means I have to additionally pay 8,16,750 (11000*75-8250)? Apologies if I have got this completely wrong.

    So, can this also raise to a defaulting scenario?

    Thanks
    Sri

  7. Sriram Ramanathan says:

    Thank you Karthik. Good. So, there is no change if i want to trade only on the indices. Everything still remains the same.
    But the point about paying 8,00,000+ amount is still then good if instead of NIFTY, if it was some stock. Is that right then?

    Thanks
    Sri

  8. Sriram Ramanathan says:

    Okay Karthik, I will share the context better. Disclaimer – I havent started doing options trading, but planning on trying after going through your excellent modules. So, some of my terms usage might not be 100% correct, as I am still learning

    Question 1

    I have placed a Long call on Divis Jul 2300 CE by paying a premium of 42.60 per lot (400). 17040 has been deducted as premium.
    On 30th July, Divis closes at 2400 and I let my option to expire ITM. With cash settlement earlier, without me doing anything, I think I would be getting 40,000 (100*400) in my account. With this new mandate of physical settlement, do I have to still buy the 400 shares @ 2300 per share, which means I have to additionally pay 9,02,960 (2300*400-17040) and get it delivered?
    Apologies if I have got this completely wrong.

    Can this also then raise to a defaulting scenario?

    Thanks
    Sri

    • Karthik Rangappa says:

      Ah yes, the closer you move to expiry, the margin requirement or stock requirement goes up, which means to say that you need to have the necessary funds/stocks to hold to expiry. Else if you don’t want to get into that, then it is better to close before expiry.

  9. Sriram Ramanathan says:

    Question 2

    Are you seeing less volumes of Options trades after this physical settlement mandate. I would assume so, with so many changes, delivery charges, STT etc., Is it the case in reality? If not, i would like to know the reason for similar volumes being traded. What am i missing to understand.

    Thanks
    Sri

    • Karthik Rangappa says:

      Not really, the bulk of the action is anyone on Nifty and Bank Nifty. So there is no reduction in volume as such. But yes you are right, a single stock option is not as vibrant as the index option.

  10. Dr Rahul M says:

    Suppose i have sold a put option for icicibank aug 300PE at R6. Should i do something manually at the end of expiry? If icici stock price goes below 300,is it enough that i maintain money (415000) in my account and the shares delivery will be done? Experts please answer. Am new to this

    • Karthik Rangappa says:

      Yes, you just need to ensure that you have sufficient margin in the system to take delivery of the shares.

  11. BSRANA says:

    I am new in the options world. Have zerodha account. I am not clear as to what is reqired to be done with regard to option trading in stocks
    Suppose i have a l Lot of HDFC @1798 in my portfoilo. I sell a call of 1850 CE @46.
    my question(1) can my holdings be treated as margin. if yes ,then how? How will physical settlement take place if
    (2) stock price remains at or falls below 1850. i wil sit on profit. (3) between 1850 to 1896 and my position in partial profit or zero profit at break even point.
    (3) Stock price goes above 1896 and closes say at 1910 making Loss.
    How does the physical settlement take place . Will i have to arrange for additional funds. Buyng or selling security physically will entail STTetc making these strategies loss making ??. Do not mind if i have raised some irrelevent querries due to knowledge gaps.

    • Karthik Rangappa says:

      1) Yes, in case of holdings, the stocks will suffice. But this is not a replacement for margins.
      2) Yes, below 1850, you get to retain the entire premium received
      3) That’s right
      4) You will have to give stock, which you already have in your DEMAT. Yes, STT will be applicable to both buy and sell @ 0.1%.

  12. Jyoti says:

    Hi sir,
    In physical settlement where there is obligation to give the delivery of the stock if i do not hold those stocks in my demat account how can i give the delivery ? because for CNC trades i cannot short shares right ? i am little confused here please clarify.
    Thank you

  13. Debu says:

    Hello sir,
    I have two queries:
    1) If I short HDFC BANK 900 PE and on expiry the spot price become 880/- then it is ITM. In this case the margin which I have to hold is 900*(550 lot size)= 495000/- ?
    2) If I long HDFC BANK 900 PE and on expiry spot price is 880/- ITM then in this case do I have to hold the same margin as earlier or 880*(550) = 48400/- and the system then credits the 11000/- profit.

  14. Bhupesh Gupta says:

    Hello sir,
    I have 4 queries, Both are related to the expiry of the options and there physical settlements.

    Lets take an Example:- If we have X stock.Current Price 100 rs on 21-7-2020

    Situation 1:- I Buy a Call @ 100 for this Stock, and on expiry it goes to 110 then how I will get delivery
    Question a.) How will i get delivery, is it at 100 Rs. or 110 Rs.?
    Question b.) will i get this Stock in my Demat account and then i need to sell it in the Market whenever i want or, it will be automatically Settlle n give me profit?

    Situation 2 :- I Sell a Call @ 100, and Again Stock goes to 110 on expiry.
    Question c.) how Physically i can give delivery to Buyer of the call. If Manual then how? if Automatic then how?
    Question d.) If I already have this Shares in my Demat account , then how can i tell Zerodha to give my Shares of Demat (Old holding of the Same X Stock)?

    Situation 3:- If i Sell a Put @ 100 and Stock goes to 90 rs. on expiry
    Question e.) At what price i will get stock @ 100 or 90?
    Question f.) Will i get stock Automatically and , Can i Sell it whenever i want?

    Situation 4:- If i Buy a Put @ 100 and Stock goes to 90 rs. on expiry
    Question g.) how will i sell @ 100 to seller or its automatic.
    Question h.) if i sell it manually then how to do it so to book profit or anything else if i am wrong?

    Thanks a lot in advance…
    User of Zerodha

    • 1. a. If you maintain the margins required, you will receive the shares in your demat account for Rs 100 a share(strike price). Your buy average will be Rs 100 + Premium paid to buy the call option.
      b. Yes, it will be delivered to your demat account. You are free to hold it or sell it whenever you like.

      2. c & d. If you have the stock in your demat account, the shares will be automatically debited and settled to the exchange. If you don’t hold these shares, it will go to auction, where us(Zerodha) will buy the share for you and deliver to the exchange(auction penalty will apply).

      3. e. You will get the stock at 100(Strike price). Your buy average will be 100 – premium you sold the contract at.
      f. Yes, same as point 1. b.

      4 g & h. Same process as point 2 c & d.

  15. SUMIT says:

    My query is as follows
    I am holding 550 (lot equivalent) shares of HDFC BANK. I decide to sell a CALL of Rs. 1000/-
    1. TWO DAYS BEFORE THE EXPIRY- CMP is 1050/- What will be the approximate margin required?

    2. ON THE DAY OF EXPIRY- CMP is Rs.1100/- Do i need to provide (1100 * 550lots size = Rs.605,000) as margin ? If yes, How do i reduce the Margin knowing that I am already holding the shares in my Demat account and intend to give the delivery of the same?

    3. For the above what is the time frame i have to PROVIDE the margin? End of the day? Start of the day?

    4.Under what circumstances does Zerodha square off positions for insufficient margin? Any penalty? etc

  16. Varun Agrawal says:

    Hello Karthik,

    I just need your small advice based on one of my observations. Hope you don’t mind.

    I noticed if I had sold a deep OTM 2300 strike for Reliance on Friday afternoon for a premium of 15.55, because of theta decay, it would become 5.1 on Monday morning according to the BS calculator. If nothing changes and I sell at exactly 9:15 AM, I will get 3x returns. I noticed the same is true for many other stocks too like MSFL which has been in sideways channel, the whole month.

    The only thing against me is pre-market changes and volatility. According to the same calculator, it would require 3.2% of pre-market changes or a 25% increase in IV for my position to go in the red. Let’s suppose 3.2% is unlikely.

    My question is what are you general observation towards IV in the expiry week for options? Does it usually shoots up or down?

    Many Thanks.

    • Karthik Rangappa says:

      In an ideal world yes, all else equal theta kicks in and you get to make the decay. However, in reality this hardly happens and there in influences working on the stock prices all of which manifest in different forms – Delta, vega, gamma etc. They all have their own impact on premium and therefore the theta decay concept is hard to monetize.

  17. Nikhil says:

    Hi Karthik ,
    Would be great if you could help understand concept of physical settlement & Covered Call in the following scenarios ( let’s assume i had bought Reliance Call option ATM @ 1800 ) :- 1. Taking Stock delivery through options contract by letting a Call option expire in the money – When I browsed online I couldnt find any site which actually advised on taking stock delivery due to high STT. So is there a scenario where you are deep in the money and when it would make sense to take delivery if you have a long term view on the stock and would like to own the stock? Like Reliance in this example. Or its generally better to square off the option & may be buy in cash market for long term.
    2. Covered call – With the deep in the money call that I was holding would it have made sense to Sell a higher Call option (2100) to make more money as I didnt think the price would go below my Call option strike price and let both the options expire. Or it is generally better to square of the call option and take the profit?Assuming a) Reliance at expiry above 2100 – both options would have expired ITM & cancelled against each other to give profit without needing physical settlement ( also avoiding higher margin for short CE)? b) if price were to settle between 1800 to 2100 on expiry day – I could square of my 1800 long if I wanted to avoid settlement & let the 2100 sell call expire to get the premium?
    3. Also what is your view on this dynamic covered option strategy in scenarios where you had bought a CE/PE which is in the money (instead of just squaring the long option) and you are of strong view based on technical/fundamental analysis that the stock price is going to remain in a range and not going to cross your ITM CE/PE till expiry (or even if it does you could square of the long position & hold the short position till expiry)? Like in this example.

    Thanks for your response.

    • Karthik Rangappa says:

      1) You can take physical delivery when you have a significant price advantage. In this, you’d have paid quite a bit for 1800CE since its deep ITM, so unless RIL goes way higher wherein the premium you’ve paid is compensated plus you have an advantage over the share price, it does not make sense to take physical delivery. I’d avoid buying shares via this approach (unless the option I buy turns deep ITM). In other words, after I buy the option the stock has to rally 10 or 15% more.
      2) This is not a covered call. In a covered call, you have RIL in DEMAT, and you sell a CE against this. What you have described is a bull call spread – https://zerodha.com/varsity/chapter/bull-call-spread/
      3) I prefer spreads over a regular naked position. Also, if the view is directionally strong, you are better off with futures, right?

  18. Vinodkumar Kasandaria says:

    Can I request you sir about call and put option ?
    As still I have to be member of Zerodha institution .

  19. kedar (KD) says:

    Hi Karthik,
    Thank You so much for your invaluable suggestion and advice to we new bees in trade world.
    My question is I have taken a 11000 CE (102.2 Premium), for 30th July expiry. The option is already in ITM now, do i need to settle physically to bag the profit or it will happen automatically after the trading hours on 30th July?

    Also would request you to share a little note on physical settlement piece for both indices & stocks, since so many queries are gearing up. Highlighting the case, on how can some one earn by just selling the option before the expiry, It would be of big help for we robin hood investors.

    Thanks again for your kind help and advice.

    Cheers.

  20. Trilok says:

    I have sold a call and now 2 days before the expiry date i got a message that my margin requirement have reached 133% of the account balance. My trade is currently in profit. I have below questions:

    a) At what point zerodha will square off this position? What would the margin percentange breach for zerodha to square off this trade?

    b) Currently my margins available shows -2.22L. Am i paying any interest/charges to zerodha to get this margin as its negative now.

    • I believe you have a stock options position. Answering below-
      a. Zerodha can square-off the position anytime on Wednesdsay and Thursday of the expiry week once you have breached 100%.
      b. Yes, interest at 0.05% per day will be charged for the negative balance in the account.

  21. Selva says:

    It read this very long ago that a zerodha trader earned lakhs by trading minutes before expiry but ended up defaulting as he has to pay much more than that as STT, atlast zerodha payed the penalty to the exchange. Does that mean we should never forget to close the contract before expiry. Kinda scary 😨

  22. sourav says:

    i have sold a put option of HINDUNILVR 2000PE AUG , my query is now zerodha has taken margin of approx 85000 and suppose till the expiry my trade becomes in the money and i wish to take physical delivery so how much margin i have to maintain 2000*300=600000-85000 which comes to 515000, or 600000 excluding the margin of rs 85000 which is paid by me to zerodha.

    and could you explain the increase of margin requirement on wed and thursday

  23. Gaurav Kumar says:

    Hii Karthik,
    I have 2 queries if you don’t mind.

    1) Does physical settlement concepts work in the strategy like Iron condor.
    Suppose I made Iron condor on SBI in the 1st day of expiry Week. Do I need to take the delivery of stock in this case?

    2) Suppose I sold SBI 280PE @ Rs 3 when spot price is 300 and it expires above 300 . In this case I grabbed all the premium. Do I need to take delivery as it expires OTM.

    • Karthik Rangappa says:

      1) Any stock option that goes to ITM results in physical delivery, irrespective of the strategy you use
      2) Nope, you can square off before expiry

  24. Sharan says:

    Great work on new outlook for Varsity, Karthik. Switching between the chapters of the same module is now very easy.
    But I believe there is a bug. On a standard Full HD display (1080*1920) on a chrome window, only chapters upto number 19 are displayed on the left hand side. To access chapters beyond 19, we again need to scroll down to the very end of the currently opened chapter, thereby defeating the entire purpose of having the module’s index on the left hand side.
    Please make the Index scrollable, if we keep our mouse pointer over it on the left hand side of the page (Just like how Kite’s Marketwatch is scrollable)

    Regards

  25. Utpal. says:

    Suppose I hold a short position in a put option with strike price at 490. If the expiry week begins with the spot price at 500, that means it is still out of the money, will I be subjected to additional margin requirement??

    • Karthik Rangappa says:

      Yes, if you have an open position in the market and going into expiry, then you will be required to bring in the physical deliver margin.

  26. Rajesh says:

    In case of Long positions in Options, There will be a physical delivery margin charged for all In-the-money(ITM) long options.

    My question is for eg ONGC is trading at 82 today in Aug series and today is Friday and next Thursday is expiry i.e 27th aug.

    If I am holding 80CE since past two weeks, when will I have to pay margin on this, will it be applicable from today i.e Friday EOD or it will apply two days before expiry i.e next Wed Thurs? Its too confusing neither zerodha is explaining properly nor any other broker.

    • Karthik Rangappa says:

      Rajesh, the delivery margins start to kick in from the Monday of the last week i.e. 24th Aug, for the August series. The margins start with a smaller % and shoots up closer to Wednesday start.

  27. Aaryan says:

    Hi Karthik sir,

    Please walk me through this (live trade example). This was my very first trade in options.

    Last Thursday, for bank nifty(on expiry), I shorted CE and PE around 200 points from ATM price. (Strategy was to earn the premium by EOD cuz of time decay).

    Market was completely range bound(swing in the market was barely 100pts) and hence I made my profit but at one instance I was confused.

    At one point when the market started falling my PE premium went in -ve. The thing which tricked me here is I had shorted at a distance 200point and the CMP didn’t even came close to it. As per the basics, if the CMP crosses the Strike price we start to incure losses.

    Will you please help me to understand this scenario?

    • Karthik Rangappa says:

      Aaryan, this is because, as the market falls, volatility increases and with the increase in vol, option premium also increases..this is common across both PE and CE. PE gains if the fall in market is swift and sharp (because the premium gains from the fall wont be enough to compensate the volatility effect).

  28. Prakash says:

    Iam new to Options trade, i had bought Exide CE Aug 2020 series on 20th August 2020, but i it was auto squared off today (24th Aug 20202) at 3pm. Iam at a loss. Is it a normal case , as i was not informed before the square off was executed automatically. Request your advice on this, as iam bit confused on this.

  29. Sravan Kumar says:

    Hi Karthik sir,

    I am new to options trade. I have a query regarding physical delivery.
    I bought 2 lots of SBI Call option with strike price 197.5 and also sold 2 lots of SBI Call option with strike price 205.
    If the SBI price goes above 205(Lets say 208), will i be getting 7.5*2*3000 in my account?
    If the SBI price stays between 197.5 and 205 (Lets say 203), will i be mandated to buy the shares at 197.5 price or will it still be netted off and i will get (203-197.5) * 2 * 3000 ?

    Regards,
    Sravan

    • Karthik Rangappa says:

      1. Net off – No physical delivery.
      2. 197.5 CE will be physically settled, other will expire worthless. So yes, you will receive the shares in his DEMAT

  30. Rahul Singh says:

    in the gambling analogy, when you sell call or put you are the house and the buyer of the put or call is the gambler…and house mostly wins. is that the right way to think and make enough safety spread of selling call and put to collect the premium. pls let me know what you feel.

  31. Vishal Sharma says:

    Hi Karthik,
    I’m a beginner and I’ll be grateful if you can answer my queries given below. Please note that all my queries are regarding options trading in Nifty.
    1. Is there a fixed value of the percentage(SPAN+Exposure) that is used to calculate the initial margin required? If it’s not fixed, what number should I use to calculate a decent approximate value(in case I don’t want to be precise)?

    2. I’m a bit confused about the margin requirement for NIFTY option seller. Once I’ve opened by selling(by having the required initial margin), can the margin required change(increase) with the changing premium of the option? Will it be calculated daily? And if I’m holding the option till expiry, do I need to have the full margin(SPAN+exposure), each day or is it okay if I just have the SPAN margin?

    3. Can it happen that I bought an option and I’m in profit but I’m unable to square off(sell) my position?

    4. Can I pledge the shares of stocks/ETFs that I’m holding to fulfill the margin required in NIFTY option selling? What happens when the margin requirement increases before the expiry? Do I need to pledge some more shares? Will some shares be squared off by Zerodha?

    5. I noticed that buying at certain strike prices of NIFTY is sometimes not allowed however I can sell at those strike prices. I wanted to know if there will be a problem if I will try to close my open position(short). Since I will need to buy to close but buying is not allowed I got confused.

    6. Is the margin requirement for option selling calculated on the basis of previous day’s closing price or the latest LTP of that strike price?

    7. In order to calculate the brokerage/charges incurred while holding a buy/sell option till expiry, what do I need to enter at sell-price/buy-price in the calculator?

  32. dhanraj says:

    CAN YOU TRADE OPTIONS INTRADAY AND HOW TO cllose your position

  33. Ravi says:

    Sir.. what if I trade in index like bank nifty and nifty….
    Case 1. – what if I buy 2 lot of nifty/banknifty and didn’t sell on expiry so how can I buy index physically

    Case 2. – what if I sell 2 lot of Nifty/banknifty and didn’t buy or didn’t square off my position on expiry…..
    So do I again need to pay anything

  34. Sandeep says:

    Hello team,

    I have a long futures of Tata motors lots zise 5700 at 155

    I have sufficient funds to take delivery for the same

    Suppose on expiry Tata motors is settled at 135 so there will an loss for me for rs 20 but as I said I am ready to tak physical delivery as my view is that stock will move in few other trading session

    So after physical settlements my demat acccunt will get credit for 5700 share at what rates at 135 or at 155

  35. mithun says:

    Hi sir,
    How can we exercise an option?

    • Does option contract gets automatically exercised, when we hold an option (which has intrinsic value) till the expiry and without squaring it off.

    • Does it attract any brokerage? (kinda like in cash segment, if we don’t square-off our MIS positions)

    • Karthik Rangappa says:

      1) Thats right, provided the options are ITM by expiry
      2) MIS positions have to be square off during the day, else it will be squared off by the system. Yes, the brokerage will be charged.

  36. Adi420 says:

    I have a bullish view in TATA steel so I deployed put spread in current month expiration I sold ATM option and bought OTM option. 1)Now let’s assume that TATA steel stock goes opposite of my direction and then both the options goes ITM. Before expiry I just can’t exit the trades because of High BID/ASK spread. Will the physical settlement will happen? Or they will cancel out each other since both are ITM? and it will be cash settled. 2) At what prices will my long option will get executed after expiration? LTP or BID ASK rate? 3) If the OTM option which I bought goes ATM and the ATM option which I shorted goes ITM will the Physical settlement take place of ITM put option which I sold in expiration? 4)If I don’t exit my credit spreads trades in last 2 days will there by any hike in margin requirement?

    • Karthik Rangappa says:

      1) If both the legs are ITM, then it will be offset. Else, the one which is ITM will be physically settled
      2) At the strike price
      3) Same as 1
      4) Yes, as you move towards expiry, margins will increase

  37. Vaibhav says:

    Hi, my query is regarding squaring off the position at expiry Day.
    1. If my position, put or call, are at OTM and are in profit, do I need to square off or system will square off automatically?
    2. Is there any change in profit n loss of my otm position due to squaring off by myself or system?
    Thanks in advance!

  38. Hemeswar Borah says:

    Hi,
    (1)SUPPOSE I HAVE SOLD STOCK OPTION PE @55/- AND REMAIN OTM AND ON EXPIRY DAY PRICE IS SHOWING AS 1/-. BUT COULDN’T CLOSE THE POSITION DUE TO ILLIQUIDITY OR NO SELLER ON EXPIRY DAY. IN THAT CASE SHALL I GET THE PREMIUM (55-1)=54*LOT SIZE ?
    (2) IF STRIKE PRICE BECOME ITM WHAT POSITION SHOULD I TAKE AGAINST MY PUT SHORT TO AVOID PHYSICAL SETTLEMENT ?
    PLZ HELP

  39. Nandi7716 says:

    Hello Sir,
    I have sold HDFC SEP 1750 PE & LT SEP 900 PE. Both are now in the money option. I like to take delivery of any one of them as there is fund shortage. Now my question is, if I do not square off till expiry from any of the above position (as both are CTM option) maintaining the fund to take single delivery then what zerodha will do on expiry?

    • Karthik Rangappa says:

      As we head into the delivery, your margin requirements will go up. In case of insufficient margins, the position will be closed by the risk management team.

  40. Shrichand Bajaj says:

    Hi What will happen when someone is running covered call? Will this be netted off or result into physical delivery? I was running reliance covered call for Sep2020 expiry. My margin has been cut but i have not received the shares

  41. Aditya Joshi says:

    Hi Karthik,
    Enjoyed reading the posts. But I had a question related to physical settlement.

    Suppose I buy & sell call option of the same underlying (but at different strike prices), will it come under netted off position ?
    Ex. Suppose I buy Infosys CE with strike price 1350 at 75 Rs & sell Infosys CE with strike price 1340 at 90 (the values are hypothetical & just taken for example sake, not related to real prices at all). What will happen if expiry spot price is:

    1. less than 1340 (both options out of money) : I’m assuming I won’t have to take/give delivery of Infy for either option & will be able to get the net Rs. 15/share premium.

    2. between 1340 & 1350 say 1348 (only 1 option in the money): can I pay off the 8 Rs/share from the net 15 Rs/share premium I received or do I’ve to give the delivery of Infosys shares (I’m guessing it should be the second way but not sure)?

    3. more than 1350 say 1355(both options in the money): This is where I’m not sure. Since, from 1 option I’ve to take delivery & from another option I’ve to give delivery. Can I just pay off the difference of Rs. 10/share from the net Rs. 15/share premium I received ?

    Thanks,
    Aditya

    • 1. If both options are OTM, no physical delivery.
      2. The short CE 1340 is ITM and will lead to physical delivery. Since it is short calls, you will have to deliver the shares or it will lead to short delivery(auction settlement will follow).
      3. As you explained, there is give delivery for 1340 CE short and take delivery for 1350 CE long, this will be netted off for your account.

  42. Koushal says:

    Dear Karthik,

    Let’s assume I have bought deep ITM options and the price of the option is big ( I know its doesnt matter ), but what happens if there is no buyer. This can be a noob question. meaning I bought the Long Call or Put options, however Since this is ITM and very very low volume, what happens if I dont find a buyer ? What happens to the person who sold the call or Put options ? Can you please throw some light ?

  43. Koushal says:

    Dear karthik, Faisal,

    a. I understand that Nifty options ( index options ) are still settled in cash. Is it true ? if not then how to take delivery of Nifty ? Is it like 75 * 11500 = 8.62lacs ?
    b. In this case, What happens say If I had long Nifty 11500 Put, and Nifty closed at say 6000 for the month. What happens if I dont close my postion and keep it in my account ?
    c. In the 2nd case, what will be my tax implications on
    1. I sell is before the expiry ?
    2. I dont sell is before expiry? Which is the higher tax ?

    Thanks for the great Job, Waiting for your reply.

    • Karthik Rangappa says:

      a) Index is cash-settled
      b) It will be cash-settled
      c) Tax depends on your overall trading activity. Expiry has nothing to do with this.

  44. Aarti says:

    Sir if I do not wish to get into physical settlement hassles, as, one I am a student and do not have a large base to start off with apart from some pocket money and two am a complete newbie to this idea of trading Options. So, I just wanted you to confirm this- if I have an account with Zerodha and a plan to start trading in Options, what is maximum time till which I can exactly hold my long calls/puts(not planning to venture into short calls/puts) in stocks (for indices i understand no delivery is required) before expiry, so that I do not have to bother at all about having a physical delivery.

    Many thanks for all the modules, sir! Truly amazing content and lucid explanation!

    • Karthik Rangappa says:

      You can square off the position anytime before the expiry. Usually, the margin requirements go up the last week of the series, so you may want to plan your trades such a way that you exit before the last week.

  45. JERRY says:

    HI,
    I am an account holder with zerodha, my question is Can i Buy call option of an Equity Stock on the Expiry Week?
    thanks

  46. Ayush Garg says:

    DOES THE MARGINAL AMOUNTS REMAIN SAME FOR THE SAME UNDERLYING IN FUTURE & OPTIONS (SELLER) .LIKE THE LOT SIZE WHICH ALSO REMAIN SAME FOR BOTH

  47. Ayush Garg says:

    Can a writer/seller of options can square off the position after receiving the premium (if yes then in how many days from initiation). Or the options to square off is given only to options buyer.

    Thank You for creating the well simplified , non-motorized , zero fee content for everybody who is genuinely interested in Market

  48. Ashu says:

    If I buy a put and on expiry it becomes ITM, how to exercise it in zerodha? Will it be automatically excercised?

  49. sunil says:

    Hi Karthik,
    I had purchased an call option BankNifty 08 Oct 23000 CE on 7th Oct. I let it expiry on the 8th Oct and Bank Nifty was 23190 at the end of the day. I should get (23190-23000)*25 = 4750 as profit. But my P&L is reporting only 505/- as profit ( difference in premiumX25).
    Can you explain?

  50. SANTANU DEY SARKAR says:

    In f and o intraday the profit willbe credited same day or not?

  51. Aarti says:

    Sir before finally starting to trade i had one last question, if a long CE has been bought then it can always be squared off before the expiry even when the premium is trading at a lower rate than bought for, just to minimise my losses, right?
    Sorry if it’s a very basic question.

    Thanks in advance!

  52. Aarti says:

    Also sir with regards to the doubt asked by sunil on 14oct’20(for some reason am unable to directly Reply there), the P&L should be credited with respect to positive movement ( as spot was clearly rising) in two premiums(premium paid when bought vs. premium received when sold), instead of the difference between strike and spot, right? And the difference in the two premiums could be much smaller (of course charges would have played their role), which could perhaps explain why his P&L got credited with a small amount?

    • Karthik Rangappa says:

      Ah, unable to place this query. If this is about when the credit will happen, then its on T+1 basis. Sorry, if I’m not getting the context.

  53. Aarti says:

    As a sidenote, if one is intending to make profits from changes in the movements of premium then, a moon shot strike price(say, 5strikes way from ATM with 45days to expiry) for long CE, should not matter, right? Because as long as the direction is right the CE should make small profit(given delta of 0.3 and close to 45% IV), is that correct sir?

  54. Raja Rajeshwar says:

    Had a doubt regarding zerodha. I sold an option on 25th sep in 180 premium and bought it back on 16 oct in 160 premium . So I booked a profit of around 2500/- in one lot. After market when I checked executed orders, I saw one order which I bought back the option(for closing my position) and another sell position of one lot again in 187 RS, but this was not done by me but by ADMNSQF was the description. Now I am confused why zerodha had to do that. That position is still open. Pls guide
    The option in this was bajajfinsv 6000 CE

  55. Bala says:

    Hi Sir, I am long on tcs futures and I also have a long put option both for October expiry.. As far as I understand from the post, these positions will hedge each other and I don’t have a physical delivery obligation.. Still I got a mail from zerodha saying I have a long itm put option and I need to take care of the margins.. Even though physical delivery requirement is not there, still margins start going up from next Monday? Kindly clarify.. Thanks in advance..

  56. CHANDRASEKAR A says:

    Today (27.10.2020), I forgot to square off currency before its expiry. What will happen to that and whether it will affect my funds position?

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