Basically I want to trade vertical spreads on stocks and indices and would like to keep the position open and let it expire so that I can realize the PnL based on the payoff diagram at expiry.
What I found was that there is some sort of physical delivery of stock that could happen if one / both legs of the vertical spread positions expire IN THE MONEY…
I do not have huge capital and hence I am asking this question… (SOO TIRED OF SURPRISES) So, I want to know every possible scenario for a vertical spread… The following two are worst case scenarios where both of the legs expire in the money…
Ideally… I want all of my positions to be settled in cash… and do not want to purchase/sell any stock.
Of course for Indices… it is cash settled… that part I know… But… for stocks I am not sure how it is done… So, I created two imaginary vertical spread positions below…
Kindly inform if I will be forced to buy/sell physical shares of the stock if any leg of the vertical spread expires In The Money…
Scenario 1: Bull Call Vertical Spread
Let say…
bought HDFC 1980 call… at 9 rupees…
sold HDFC 2000 call… at 3 rupees…
HDFC stock closed at 2010 on Expiry… Both legs of the vertical spread closed ITM.
What happens here ???
I hope everything is settled in cash…
Scenario 2: This is Bear Put Vertical Spread.
Lets say I…
sold 1980 Put at 12
bought 2000 Put at 23
The Market Closed at 1965. Both of the legs closed ITM.
What happens here ???
I hope everything is settled in cash…
Theoretically yes both should be netted off and settled in cash but we may expect surprises when selling of options are involved. Option buyer has the right to choose to exercise that option or not, so if it expires CTM ( 1st three strikes of ITM are called CTM- close to money) then buyer has option to letgo of premium and seller can keep that. But in this case one side physical settlement can happen.
What happens when both legs of the option are deep in the money… at EXPIRY?
Because… if one or both legs of the spread are CLOSE TO MONEY… then there should be enough liquidity to square off the vertical spread’s both legs (most of the time)…
Hence… just tell us what happens when both are DEEP IN THE MONEY… and there is NO LIQUIDITY TO GET OUT OF THE TRADE…
Will they be cash settled ?
For Long Call and Short Put (both bullish) it seems that from (ExpiryDay - 4) days… there will be blockage of margin capital to facilitate the physical delivery assuming that the options are ITM…
Since both options are deep in the money (as assumed here…) will the long position’s margin blocked for physical delivery be OFFSET BY the simultaneous SHORT position created by the second leg(which is also assumed to be deep ITM) of the vertical spread?
By Offsetting… there should be no blockage of funds (ideally…) due to having a vertical spread position.
These are valid questions any trader would want to know… I know I can find answers from other brokers… Not an issue for me tbh… It will only help others if you break silence and enlighten the traders…
Sir… theoritically anything is possible… what is practical… please clarify… What would YOU … DO IN SUCH SITUATIONS… as a broker… do if a trader has such position ?