Physical settlement of ITM stock options - How is the penalty amount calculated?

F&O
1

Hi, I am curious about the worst case scenario of physical settlement of stock options. Suppose I buy a call option which ends up ITM at the time of expiry, but I am unable to close my position due to no volume at that strike price during the last week. I know I can sell same amount of ITM call option to cancel off the physical delivery, but let’s consider I forgot and now I have to take the physical delivery.

Assume I bought 5L worth of call options that end up ITM. Now the underlying price of this is 2Cr. at the time of expiry. Zerodha will start asking for margin from E-4 Day onwards (10% of VaR + ELM +Adhoc margins) and so on increasing it everyday. If I don’t provide that margin and this goes on till expiry day then -

Will zerodha calculate margin shortfall penalty for each day till expiry? And what happens after expiry? What will be the approx. penalty amount that I will be charged in the above case?

I read that their RMS team will sell those stocks. If auction happens, how will the profit from that trade settled?

2

I guess the most likely thing to happen will be that the RMS team will sell the illiquid option at a much lower price than the fair price.

Except the last 30 minutes of expiry day, when I have actually experienced liquidity drying up completely, usually you will find a buyer at some price.