How does F&O physical settlement work?

F&O
1

Is the following a correct sequence of physical settlement for a covered call option?

HDFC in Demat holding: 300 (lot size)
Buy cost = 300 * 2,200 = 6,60,000

Sell HDFC 2400 CE:

  • Underlying spot: 2,400
  • Premium receivable: 300 * 50 = 15,000 (example)

On expiry:

  • Underlying spot: 2500
  • So, give delivery of 300 HDFC @ 2400?

What happens now?

  • Give delivery at Rs. 2,400 ?
  • Receive cash 2400 * 300 = 7,20,000 ?

So when the contract settles, will I receive Rs. 7,20,000 (minus cost)? Therefore, is the total P&L on HDFC like the following?

(2,400 - 2,200) * 300 + 15,000 = 75,000 (minus cost)

Or, is there a different interpretation?

Thanks.

3

I think this is correct. You should get 75,000
(2,400 - 2,200) * 300 + 15,000 (premium for selling CE) = 75,000 Rs

1 Like
4

Since you’re long futures and short ITM call, the contracts will be netted off.

You’re right about the 75000 of net profit figure. Physical settlements cost more brokerage, so you may want to account for that as well.

5

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