Physical Settlement of Multi-leg Option Strategy

[AmitUM]

@nithin Zerodha’s policy on physical settlement says this:
“If you have 2 open positions on expiry that result in a net-off(Long futures and short call options, short put, and short future, etc) 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”.

To be adequately clear, let’s consider the following scenarios:

1. One long call and one short call on the same underlying stock, both expire ITM. As per the above policy, these should be netted-off resulting in no delivery obligation. STT will have to be paid on the intrinsic value of the long call.
2. One long call and one short call on the same underlying stock, one expires ITM and the other expires OTM. There will be a physical settlement obligation on the ITM option. If this ITM option is the long one, STT will have to be paid on the intrinsic value thereof, but if it is the short one, STT would be charged to the counter-party.

It will be great if you can confirm if the above understanding is correct.

[siva]

@AmitUM

One long call and one short call on the same underlying stock, both expire ITM. As per the above policy, these should be netted-off resulting in no delivery obligation. STT will have to be paid on the intrinsic value of the long call.

Right, both will be netted off. Yes, stt has to be paid on long ITM call.

@AmitUM

One long call and one short call on the same underlying stock, one expires ITM and the other expires OTM. There will be a physical settlement obligation on the ITM option. If this ITM option is the long one, STT will have to be paid on the intrinsic value thereof, but if it is the short one, STT would be charged to the counter-party.

Correct but now STT is not on total contract value, can check this for more.

[Prakhar_Agrawal]

In this case will additional physical settlement margin would be blocked by Zerodha or not.

[siva]

Will be blocked, twice of span+ exposure on wednesday and thursday.

[AtD]

@siva
Just to clear the understanding, please confirm the below scenario.

SBIN Spot is 258.

1. Suppose I have sold 280CE and bought 290CE and on expiry day SBIN is closed at 288. Still this trade is not eligible for physical delivery even if there is the difference in the stricks (280CE and 290CE)?

2. Opposite of above.
   Suppose I have bought 280CE and sold 290CE and on expiry day SBIN is closed at 288. Still this trade is not eligible for physical delivery even if there is the difference in the stricks (280CE and 290CE)?

If the above is true then can we say that, if the position is hedged then it will not be applicable for physical delivery irrespective of the difference in selected strikes?

Thanks.

[siva]

@AtD

If the above is true then can we say that, if the position is hedged then it will not be applicable for physical delivery irrespective of the difference in selected strikes?

In both the cases one side is eligible for physical delivery. One side is always ITM right.

[AtD]

Thanks.