A query on Option settlement from a client on LinkedIn

Posting this query that a client had posted on our LinkedIn comment section, replying below:

Hi Zerodha
First of all let me tell you that I really like trading on zerodha after experiencing other platforms.

But I want to know the process how zerodha decides the closing price of a stock option (in FNO)after the closing bell when you perform the maintenance activity?
Reason for asking this question is (with example):

  1. Less Liquid Option: Lets take an example of Less liquid stock option ALKEM , consider I have sold a CE of certain strike price and I opened this segment (first trade is mine) at price “X” for a certain month lets say AUGUST. Now trading in this option at this strike is negligible not even a single trade in last 5 days, but to my surprise the current price of the option is just doubled ‘2X’ that of my price at which I sold this CE even though the the original stock got down in the last trading session i.e. the stock is moving in favor of my position. So, I want to know how did you decide of doubling this price of this stock option which no one expects. And because of this my fund got in negative and I had less funds to trade next day.

  2. Liquid Option: Lets take an example of liquid option like TITAN , again lets consider that I sold a CE of certain strike price at a certain rate now even though the LTP(last traded price) of this stock option was X but to my surprise next day the price of this stock option at this CE was 1.75X even though the original share price of the TITAN didn’t show that much move and again it was moving in favor of my option trade (i.e. going down)

Same thing happens for PE as well in all the stocks. And it has a huge impact on retail customers like me as :

  1. First of all it changes the sentiments of the trades on the next trading day. And doesn’t reflect the true buyers and sellers even though the original price of the stock is moving in your favor.
  2. Major impact is on the funds of the retail customers as sometimes this makes the fund in negative by 20-30K in a single potions even though the stock option is very liquid and moving in your favor. Making less funds available for you next day for trading.
  3. this makes the trading skewed for all the traders specially retailers for the next day.

Please help me and other traders or investors to understand this process who might have this same question.

1 Like

The closing price of all contracts is published by the exchanges(NSE, BSE and MCX) which is either the VWAP of the contract for the last 30 mins or the base price(thereotical price calculation).

When there are no trades in the last 30 mins of the trading session in the contract, the exchange determines a base price (a theoretical price) to ensure that the contract is appropriately priced. This price is usually inline with the underlying price as well as the implied volatility of the contract. About the increase in margins, it is unlikely to have a margin increase of the underlying has been trending in your direction but it can go up if the volatility of the contract is higher now.
The base price file is available on the NSE website here (Filename- F&O- Base Prices for Illiquid Contracts).

Trades happening at abnormal prices within the execution range and circuits limits is unlikely. However, if they do happen, short option contracts are not marked to market daily and all losses will only be unrealised. On expiry, the contracts will get settled at the intrinsic value from the underlying price. As explained in Point 1, the premiums and margins would only be higher even if the direction of your trade is correct if the volatility is more(very common on quarterly result days, macro announcements, etc.)