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.
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.
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?
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.
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.
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?
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.
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.