I’m currently holding a futures contract that I hedged with 2 ITM put options to limit potential losses. The underlying asset has dropped significantly, making my put options deep ITM, but they are now facing low liquidity. This has also led to increased margin requirements, as it seems a significant portion of the margin needs to be in cash for ITM options.
To manage the position, I shorted 1 ITM put option with a lower strike price (and higher liquidity) than the puts I initially purchased.
Now, I have a few concerns:
Exiting the position: Given that my losses are capped, what’s the most efficient way to exit this complex position, considering the illiquidity of the original put options?
Holding to expiry: What are the potential implications and risks if I hold these contracts until expiry?
Margin reduction: Are there any strategies to reduce the margin requirements on this position until the contracts expire?
Can you give a bit more context on what the underlying instrument is? What is the instrument and what is your strike price? Also, what was your cost and just how far deep the option is ITM?
You could take physical settlement if the underlying is a Stock and not an Index. Also I believe stock options in India are American style- so you could exercise them now as well. Do note that exercising the options early can lead to the loss in extrinsic value but given the low liquidity, you may not have any other way to exit early.
If this is an index, then the option is European style and you can’t do physical settlement. So given the low liquidity, you are basically stuck until expiry.
I am thinking of shorting some ITM Put options which have better liquidity. I believe the put options would get cancelled out on expiry. I am worried about the additional margin requirement in the last week if I maintain these numbers.
