Noob question about physical settlement

So someone here posted a particular scenario where in they had to form a spread to avoid the costs of delivery. But what made me wonder is what exactly happens if you let a spread expire. The question I am trying to ask is that doesn’t the netting off in the expiry of a spread simply mean that you arent obligated to either take delivery/give delivery but the costs and profit and loss associated with the exercising of such still apply. Let me explain with an example -

So first I am gonna go with the same scenario that made think about this query in the first place.

So let’s just say that on the expiry I am holding an ITM short call and I don’t have the underlying shares to deliver. To avoid doing delivering, I take a long futures position and let the spread expire. So what happens now? Even though I have netted off the obligation itself, I am still obligated towards the counterparty i.e. for the short call I am still required to deliver the stocks and for long futures I am still obligated to take delivery of the stocks. What I am guessing is that the shares that would be delivered to me would get delivered to the person who I am holding short call against and the money received from the call buyer would go to the party that I am long futures against. And of course the loss arising out this situation would be born by me along with the charges of exercising both the contracts.

Is that right? Is my assumption for the consequences of letting a spread expire correct?

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If you have 2 open positions on expiry that result in a net-off(Long futures and short call options) you are not required to give or take delivery for the position. However, there will be STT charged on the long position(s) as this is treated as notional delivery.

For all netted-off positions, at Zerodha the brokerage will be charged at 0.1% of the physically settled value…

more info https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement

What about the loss resulting from the above scenario?

Any profit or loss you will be making from this trade is credited to / debited from your account, just like any other normal trade.

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But I wouldn’t need to maintain any extra margin to accommodate for the loss right? Could it just be deducted from all the margin I deposited and the net margin remaining after all the charges and the realisation of the loss be credited back to my account on the same day?

Also, what about a situation in which a profit was made? Is it settled into the account the same day or does it take a day or two?

Also(please bear with me), the ITM call holder in the above scenario is technically holding a call that still has intrinsic value. Is that remaining premium value credited back to his account and if it does when does it settle?

Any loss arising and charges can be adjusted from the margins blocked for the trade as these are released back to you on the same day.

But if you are using Cash Component and Collateral to fund your trade then there will be no cash in your account to cover for loss and charges, which will result in debit balance, in this case you will have to add funds.

You will be able to use this from the next day.

This gets credited to your account the same day.

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Good question.

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What does this para mean? Wouldn’t 50% of the margin be paid in cash by me?

I was referring to margin recieved from pledging Liquid ETF’s, Liquid Mutual Fund’s, which is considered as cash equivalent.

Yeah i know what that means but you are saying something like the loss/charges wouldn’t get covered if part of the margin was collateral. What does that mean?

As you said above.

But I wouldn’t need to maintain any extra margin to accommodate for the loss right?

So I assumed you wouldn’t have free cash in your account, and presented you a hypothetical scenario that if your trade is funded by Cash Equivalent and Collateral then as there is no cash in your account, the margin released upon expiry won’t cover your loss and other charges and your account will result in debit balance.

But what if the loss/charges are getting covered by the cash or its equivalent, then no problem right?

Margin recieved from pledging securities won’t cover for your losses and charges, for that you will need cash in your account.

squinting eyes OK… It doesn’t make sense to me. Let’s take different scenarios and evaluate them.

  1. All margin is paid in cash. Loss covered - Yes or no?

  2. 50% cash(no equivalent), 50% collateral. Loss covered - yes or no?

  3. 50% cash equivalent, 50% collateral. Loss covered - yes or no?

Covered.

Covered.

Not covered.

It is easy, when you take a trade and make a loss, the loss and the charges associated with the trade has to be paid from cash.

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Hmmmmmm… When you said cash equivalent, I was thinking it had all the benefits of cash. So yeah that caused the confusion and lengthed the thread.

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What if no cash to cover ?

This will result in debit balance and there will be interest charged on it at 0.05% per day.

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What is used margin in negative ?

Explained here.