Physical settlement for ITM options

I am new to options and I have some doubts. I was watching a youtube video where that man was talking about taking/giving delivery of shares.

  1. What happens if I don’t square of my options positions on expiry day and the position is in the money?

  2. Let’s say i sold a strike 1000 pe and a strike 800 ce and on expiry apit was 900 making both calls ITM, what will happen in this case if I don’t square off my both positions? Assuming the total premium received as rs250.

Someone kindly help.

How does the new physical settlement of stock derivatives work? - Trading / Announcements - Trading Q&A by Zerodha - All your queries on trading and markets answered (tradingqna.com)
It is expained in detail here.

For point 2, there wont be any delivery obligation as PE and CE ITM will negate each other.

So in point 2, you mean to say that if I don’t squre off the positions, nothing will happen? I will not be asled to give/tale delivery?

If so, what about the margins? Will they increase on expiry day?

If you are trading stock options and on expiry if you didn’t squareoff your options positions which are ITM then your it will sattled physically…
For ITM call option, if you are long then you have to take delivery or if you are short then you have to give delivery.
For ITM put options, if you are long then you have give delivery or if you are short then you have to take delivery of the underlying.

As both the call and put options expires ITM, in short call you have to give delivery and in short put you have to take delivery… So it will be netted off…
And margins requirement will increase during expiry

So as per this, if I don’t square off till expiry day 3:30 pm, them the difference between call and put strike prices will be the loss settled in cash without any actual delivery taking place right?

Yes…
And in both the options you are making a loss…
For ce:- 100- premium received
For pe:- 100- premium recieved

So if your total premium is 250 then your ideal profit will be 50 except tax and charges

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And what happens in case of nifty?
Let’s say I had sold a 15900 put at rs50 premium and let it expire without squaring off?

Are nifty contracts always cash settled?

The profit will be (15900-15824) + 50?

Yes Index options are always cash settled…

If you short nifty 15900 pe at a premium of Rs 50 and if it expires at 15824 at the expiry, then it will expires ITM. So you will be making a loss.
Your loss will be :- strike - spot - premium recieved
(15900-15824)-50 = 76-50 = 26* lot size = 26* 75 = 1950

Sorry i meant to say 15900 call but okay, i get the concept, in call it would have been 1950 profit then.

In case of OTM options, is it then better to let the options expire or is it better to square them off around 3:10-3:20 pm yourself?

In case of Index OTM options you can let it expires worthless and you will keep the premium… But there may be some additional charges i think so… @ShubhS9

Yes then the 15900 ce will expire worthless and will get the premium

These charges are charged by the exchange or the broker? And any idea about the amount of charges?

There are no charges for letting your OTM position expire. It’ll expire worthless and if you’re a option buyer, you’ll lose the entire premium paid and if you’re a option seller, you’ll get to keep the entire premium received.

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So in that case if we let OTM option expire, do we basically save on the brokerage that would have been otherwise charged on the second leg (square off) transaction?

Right.

Then I believe it is always better to let the OTM options (be it index or stock) expire and not square them off?

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Not always… If it’s confirmed that the option position will gonna expire OTM i.e worthless then it will be better to square it off before expiry then you loss will be little less because of the little extrinsic value the option has…

Lets take an example, let say you buy an ce of nifty at Rs 50 ( high extrinsic value) considering you bought an ATM ce and according to the current price it is confirmed that the ce will expire OTM so if :-

  1. you let it expires it will expire worthless or
  2. you can square it off before the expiry.

So in case 1 you loss all your premiums
Loss:- premium paid * lot size * no of lots

And in case 2, you square it off when it still has some extrinsic value.
So loss:- (premium paid - squareoff price)* lot size * not of lots.

I hope this helps

Yes in case of option buying this is okay.

But in options selling/writing, I believe letting it expire is a better choice? Correct me if I’m wrong.

Yes… In case of options writing… One will get to keep the maximum profit i.e premium if the options expires worthless at expiration…

Thank you both @ShubhS9 @MightyBulls for the help!

I personally close it at 0.1. Usually this will happen around 3 o’clock. I use that margin for selling deep OTMs of next week. Most of the time these will lose at least 2 points before the close of that session itself. And if next day we have a flat opening another 2 points minimum. So my brokerage cost is covered over here.
It can go against me as well if vix shoots up the following day or there is a huge gap up or gap down.

My past experience shows 90 percent of the time it has been beneficial.