what is the policy on physical settlement of an option which are deep in the money.
For a scenario- of Hindustan Unilever
if i have shorted a deep in the money call option of say 2000 CE and at same time i am long on unilever future…
I intend to carry both the positions till the expiry, now with respect to physical delivery of shorted option (which is deep in the money) what kind of fund requirements i need to fulfill to have both the position till expiry?
In this scenario on expiry both positions are netted-off against eachother as Long Futures carries obligation of taking delivery of shares and Short ITM Call carries obligation of giving delivery of the shares.
The margin requirement for Stock Futures and Options increases by twice of the SPAN + Exposure margin on Wednesday and Thursday of the Expiry week.
Currently to Buy Hindustan Unilever Futures you need 145k margin, which will increase to 290k on Wednesday and Thursday of Expiry Week and for Short 2000CE current margin requirement is 190k which will increase to 380k on Wednesday and Thursday of Expiry Week.
Current cost of this trade is 170k after factoring in margin benefit of 165k, on Wednesday and Thursday of Expiry Week cost of this trade will increase to 505k (290k + 380k = 670k - 165k margin benefit).
PS: All these figures can vary according to volatility.
Explained it really well… Thanks!
@shubhS9 Thanks for the response. What would happen if I have a CE credit spread on a stock when, on expiry,: (a) both its legs go ITM (b) only one sold leg goes ITM and other stays ATM or OTM?
Would it be netted off also in the case(s) above, if not would my pledged securities be sold off for taking the physical delivery or any penalty be levied for not having required amount of cash in the account.
Will be thankful for the response.
In scenario a) where both your positions expire ITM, your obligations will be netted-off against eachother.
In scenario b) where one of your position expires ITM and other OTM, in such case there will be no net-off of obligation, for net-off to happen both positions should expire ITM. Check below table for reference.
If you do not have enough funds to take physical delivery, your account will result in debit balance. In this scenario you are required to bring in funds, failing which the delivered shares will be liquidated to make good of the debit balance. Interest will be charged at 0.05% per day on the debit balance in the account.
For more information you can read this.
Thanks @ShubhS9, fund requirements to take physical delivery must be quite a lot as compared to that required for purchasing a Futures lot of a stock. So it will be a huge debit balance.
Whats the ideal time for following (a) to exit such itm positions if one wants to avoid physical delivery, (b) till when one can buy a further inside CE strike to net off the sold leg thereby creating debit spread.
Yes, fund requirements to take delivery will be Futures Price * Lot Size * Number of lots if you are holding Futures and Strike Price * Lot Size * Number of lots if you are holding Options.
You can square-off your position anytime before expiry (Market close 3:30 PM).
Long Option positions aren’t allowed on the last two days of expiry, before that you can take Long positions, though you need to know that the exchange charges Physical Delivery margin on Long ITM Options in a phased manner from prior Friday of expiry week. For more information you can read this.
Thanks @ShubhS9, your responses clarified my doubts. It will be indeed helpful in planning my trades in future.
Hope there’s no early assignment of stocks prior to 3:30 pm, not even in in any rare black swan event.
Assignment will only happen after expiry.
Thanks, so that may only happen if no buyer available to square off a position.
Right. If you are not able to square-off your ITM position before expiry then you will be obliged for physical settlement.
Hi @ShubhS9, kite is not allowing me to exit my long Put leg on BajajFINsV quoting insufficient margin, I have a CE spread placed on the same which is ITM. How do I exit my positions now please guide. !
Thanks
Do you have any existing pending order? Also, if can you message your ID, we will have this checked.
Hi Nishant, you already have pending exit order.
