This question is regarding physical settlement of options on expiry day. If I sell Put Option how the settlement mechanism will work. I am too confuse in this scene.
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If you’ve sold a put option, remember that there’s a counterparty who has bought this from you.
Upon expiry, the right to exercise vests with the buyer.
If you sell Put options and then they expire ‘In the money’, you will receive delivery of the stock to your demat account if the put option buyer decides to exercise the contract. Please ensure to have sufficient margins in your account in order to take delivery failing which your broker can square off your position.
If the Put option expires ‘out of the money’, you get to pocket the entire premium collected.
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@VenuMadhav
if the option expires out of the money, do we need to square it off on the expiry day or we can let it expire? what will happen if it is in compulsory delivery category and expires out of the money?
thank you
If it expires OTM, the buyer doesn’t get to exercise it, so you get to retain the premium that you collected upfront. However, if it’s Close to money and ends up ITM with an intrinsic value of 5 paisa, it may still get assigned to you. So best to square off yourself.
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Thank you for your reply, just a quick question… What is the physical settlement procedure for Index options??
No physical settlement for Index, they are cash settled.
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Thank you
A bit confused regarding this. If I’ve sold a put option & it expires ITM, can there also be a case where the buyer doesn’t exercise his contract? If yes, what happens then?
@VenuMadhav
If it expires ITM then it will go for compulsory physical delivery, if it expires CTM ( 3 stikes ITM from spot) buyer has option to not to exercise then seller can pocket entire premium received, but the assignment is like random.
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So basically, if it’s expiring ITM, either you square it off or keep money in your account to take delivery, right?
If you are long call option, yes, if long put then need to give delivery and viceversa for short options.
I never understood why people say CTM at expiry…
An option is either OTM OR ITM at expiry…
Wth… Just confusing terms used to scare people.
If the option is expiring CTM… it means there will be enough liquidity to close the position…why not do that instead… why depend on brokers and exchanges…
Any special reason for doing that?
@VenuMadhav if I have short position on ITM put when would the share will get credited in my account or can I sell them next day after expiry.
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At what price i will be allotted?
Lets say I sold SBI at 140 PE at 5 premium . current price is 150.
By the time of expiry, it went down to 110. What price i will be allotted the shares?
2 I need to to the buyer at current premium, which will become say 25. That will be my loss?
Your shares will be alloted at 140.As the market price is Rs.110 your loss will be Rs.25,as you already received premium of Rs.5
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Suppose if sbi expires on 138 for 140 put writing. We get physical delivery of shares at Rs. 140 in our demat account . Now if sbi share is at 160 and we sell now…
We get 20 Rs pft on this ??
You will receive the shares at Rs.140 from exchange mostly between t+3 to t+5 days after the expiry date.If the share moves from 138 to 160 after that time you can sell at 160 and make profit of Rs. 20.
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Hello @VenuMadhav does the broker square off the position on the very first day of last week or do they square off on the last day of expiry if there’s insufficient margin available?
It can happen on wednesday or thurday, at the discretion of RMS.
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Hi @VenuMadhav,
What if i shorted in the money put and also shorted future as well.then what will happen after monthy expiry if my put still be in the money or CTM ?