Margin Required for Covered Calls If Stock ends up ITM on Expiry date

[Manikandan_KK]

Hi Zerodha Support,

I would like clarification on the expiry-day margin requirements for the following strategy using ITC stock options.

Assume all 3 below positions are taken on Nov 1 (for example illustration ONLY and NOT actual positions in my account):

1. Hold 1,725 ITC shares in my Demat account (purchased at ₹266).
2. Sell 1 lot of ITC November ₹270 CE.
3. Buy 1 lot of ITC November ₹300 CE.

Assume ITC closes at ₹302 on expiry day (Nov 24, 2026), and I keep both option positions open until expiry without squaring off either leg. Also, 1,725 ITC shares in account are untouched.

My understanding of the settlement:

• The short ₹270 CE creates an obligation to deliver 1,725 ITC shares at ₹270.
• The long ₹300 CE creates an entitlement to receive 1,725 ITC shares at ₹300.
• Since both options have the same underlying, expiry and quantity, the give-delivery and take-delivery obligations should net off.
• The net settlement should therefore be a cash difference of ₹30 × 1,725 = ₹51,750 (before premiums and charges), with no net delivery of shares.

Questions:

1. Physical settlement: If ITC closes at ₹302 (on expiry date) and I hold both CE positions until expiry, will the short ₹270 CE delivery obligation (1,725 shares) and long ₹300 CE receipt obligation (1,725 shares) be netted off? In other words, will I simply pay the ₹51,750 difference (₹30 × 1,725), with no actual debit or credit of ITC shares in my Demat account? Will my existing 1,725 ITC shares remain untouched?

2. Expiry-day margin requirement: Since the maximum difference between the two strikes is only ₹30 per share (₹51,750 for the lot), will Zerodha calculate expiry-day margin based on this defined risk, or will it still require separate physical-settlement margins for both CE positions? What am I asking is - is it sufficient to maintain only ₹51,750 as ADDITIONAL margin in Zerodha account or more?

3. If the total margin requirement is ₹X, will Zerodha require me to maintain that additional amount even though I already hold 1,725 ITC shares and both option legs offset each other’s delivery obligations? Please clarify the actual margin calculation and whether either leg could be forcibly squared off due to a margin shortfall.

[Manikandan_KK]

Zerodha Calculator shows

1. Margin blocked after execution = 5,16,389.35
2. Margin required = 5,37,451.35

Over and above, 5,37,451.35 - will there be ANY scenario till Expiry, where additional margin needs to be held?

[K_Saisathish]

@Manikandan_KK

1. Physical settlement: If ITC closes at ₹302 (on expiry date) and I hold both CE positions until expiry, will the short ₹270 CE delivery obligation (1,725 shares) and long ₹300 CE receipt obligation (1,725 shares) be netted off? In other words, will I simply pay the ₹51,750 difference (₹30 × 1,725), with no actual debit or credit of ITC shares in my Demat account? Will my existing 1,725 ITC shares remain untouched?

Considering ₹302 as the ITC closing price, the short 270 CE and long 300 CE positions will be netted off, eliminating the requirement for any additional margin. The shares held in the Demat account will remain untouched.

@Manikandan_KK

2. Expiry-day margin requirement: Since the maximum difference between the two strikes is only ₹30 per share (₹51,750 for the lot), will Zerodha calculate expiry-day margin based on this defined risk, or will it still require separate physical-settlement margins for both CE positions? What am I asking is - is it sufficient to maintain only ₹51,750 as ADDITIONAL margin in Zerodha account or more?

Yeah, if one turns OTM and the other stays ITM, physical delivery margin kicks in. Any net-off position wouldn’t require additional margin, so we won’t take action even if margin is blocked. But if a single leg remains open heading into expiry, it would lead to an increase in margin requirements.

@Manikandan_KK

3. If the total margin requirement is ₹X, will Zerodha require me to maintain that additional amount even though I already hold 1,725 ITC shares and both option legs offset each other’s delivery obligations? Please clarify the actual margin calculation and whether either leg could be forcibly squared off due to a margin shortfall.

Since ₹302 is considered the closing price, no additional margin requirement will arise.

[Manikandan_KK]

Got it thanks @K_Saisathish

From where the Rs.51,750 loss will be attributed during Physical settlement?

1. Is it attributed by selling ITC Delivery stocks OR
2. the upfront margin collected on selling 270 CE Nov Expiry?

[K_Saisathish]

@Manikandan_KK

2. the upfront margin collected on selling 270 CE Nov ExpiryYou cant directly direv

Your calculation is based on the intrinsic value difference between the two strike prices. However, the actual net premium (premium received from the 270 CE short position minus the premium paid for the 300 CE long position) will vary at the time of execution, and this net amount will determine your final obligation.

[Manikandan_KK]

Yes I understand there will be final Obligation since ITC ends up at Rs.302 (on the day of expiry).

But the obligation of Rs.51,750 (approaximated), will be settled via which of these 2 options?

1. by auto selling ITC Delivery stocks OR
2. the upfront margin collected on selling 270 CE Nov Expiry? since assume upfront margin paid for selling 270 CE Nov is 75xxx (approximated). Since the upfront margin collected is 75xxx and by deducting 51,750, remaining 23xxx will be credited back to me?

I have approximated the numbers since I’m trying to learn the edge cases, before executing any trades (to understand all nitty gritty details to be on safer side).

[K_Saisathish]

Let’s understand this with a simple example:

Short 270 CE: You receive ₹17,250 (1725 × 10 premium ).

Long 300 CE: You pay ₹8,625 ( 1725 ×5 premium ).

Net premium received: ₹17,250 − ₹8,625 = ₹8,625. This is the amount credited when you execute the trade.

Now, assuming ITC closes at ₹302 on expiry day:

270 CE intrinsic value = ₹32.

300 CE intrinsic value = ₹2.

Net intrinsic value = ₹30.

Your expiry obligation will be ₹28 × 1,725 = ₹48300.

How will this be adjusted?

On expiry day, the margin blocked against the short 270 CE position (SPAN + Exposure), assumed to be ₹75,000, will be released.

After adjusting the net loss of ₹39675, the remaining will be ₹35325.

So, the blocked margin will be released, the expiry obligation will be settled, and the balance will be reflected in your account.

[raghav.95]

1. yes, it will net off. ITC holding untouched

2. ₹51,750 as ADDITIONAL margin could be insufficient. Im not sure.

3. will Zerodha require me to maintain that additional amount - Yes , strangely. Even if you already hold 1,725 ITC shares and both option legs offset each other’s delivery obligations, you still require margin.

But it would be better if we get an official answer from zerodha team.

Also, with CAS , closing can be ± 3% , so hard to predict settlement price.

[Manikandan_KK]

Thanks for the example @K_Saisathish

But I read in few places, since this is a covered-call strategy, ITC shares [delivery] will be sold for settlement process [if I let it auto-expire]. Because I need to deliver 1725 shares at 270 strike price to the buyer and I already hold the 1725 shares in my account. Then why would the loss of ₹39675 be touched from my upfront margin collected [ie., 75k in this case]

So, I’m unable to relate to below statements [since here If Margin are impacted and I will have less and less capital further and further if same scenario repeats],

"After adjusting the net loss of ₹39675, the remaining will be ₹35325.

So, the blocked margin will be released, the expiry obligation will be settled, and the balance will be reflected in your account."

There are two cases,
Case 1

• I get back my 75k in my account [margin for selling Nov 270 CE].
• 1725 ITC shares in my account are sold for settlement process.
• I earn premium of 8,625 + (270 - 266, my ITC buy price) = 4 * 1725 = 6900. Totally = 8,625 + 6,900 = 15,525. This is my profit

Case 2

• I get back only ₹35325 back in my account [after deducting loss from upfront margin of 75000 paid]
• 1725 ITC Shares in my account are untouched
• I earn premium of 8,625. This is my profit

Which of these 2 cases is true?

[K_Saisathish]

@Manikandan_KK

But I read in few places, since this is a covered-call strategy, ITC shares [delivery] will be sold for settlement process [if I let it auto-expire]. Because I need to deliver 1725 shares at 270 strike price to the buyer and I already hold the 1725 shares in my account. Then why would the loss of ₹39675 be touched from my upfront margin collected [ie., 75k in this case]

This is possible only when there is a stock delivery obligation. In this case, since you hold a netted-off position, the obligation is reduced to zero, so no stock delivery is required.

@Manikandan_KK

So, I’m unable to relate to below statements [since here If Margin are impacted and I will have less and less capital further and further if same scenario repeats],

There was a typo in my earlier message. ₹75,000 is the margin that will be released, while the loss obligation will be debited from your account.

[Manikandan_KK]

Oh got it! those 2 options netted off [with respect to quantity as well] and hence ITC shares in my account are untouched. So, no obligation for share settlement.

in case of pure covered call [ITC held + 270 CE sold], then ITC shares will be sold for settlement.

Thanks @K_Saisathish.

[K_Saisathish]

@Manikandan_KK

• I get back only ₹35325 back in my account [after deducting loss from upfront margin of 75000 paid]
• 1725 ITC Shares in my account are untouched
• I earn premium of 8,625. This is my profit

1. Yes
2. Yes
3. Net loss (premium received on trade day minus premium paid on expiry day): 8625- 48300 = -39675. You receive the premium on the trade day and pay the premium on the expiry day.

[Patel_6]

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