Policy regarding Close to Money contracts (CTM)
Exchanges have provided an option to not exercise long CTM contracts. We will be using this option on expiry day in case the cash balance and the intrinsic value of the option contract is less than twice the SPAN+Exposure margin (Exchange mandated) required to take a position in the futures contract of the same stock for the current expiry.
For example: If you are long 1 lot of WIPRO Oct 19 240 CE and let it expire and WIPRO(Stock) settles at Rs. 243, this contract will be a CTM contract. The intrinsic value of this contract will be 3 [243-240] x 3200(lot size) = Rs 9600.
Post-market closing we will check if the client’s free balance (Cash balance + Rs 9,600) > Rs 2,76,518 ( Twice the SPAN +Exposure margin for WIPRO Oct future contract). If client balance is lesser than Rs 2,76,518, this position will be marked as “Do not exercise” and the option contract will expire worthless. If the balance is more than the SPAN+Exposure, we will let the option be exercised, resulting in physical delivery.
All costs arising out of such delivery obligations will be applied to the client’s account.
The above text is copied from Z-connect.
My question is:
If i am fully funded to exercise this option, ie I have the funds to buy 1 lot of WIPRO . What other extra costs are involved in doing so ?
What are the additional risks involved ?
Thanks and best regards
Girimon