I have a question regarding the risk management protocols for exceptionally profitable long options positions, particularly during a market crash.
Consider a hypothetical scenario, inspired by stories from the March 2020 crash: A trader buys a significant quantity of out-of-the-money (OTM) BankNifty put options for ₹30, with a total investment of ₹6 crore. As the market crashes, these puts skyrocket in value to ₹10,000 or ₹11,000 before expiry.
My question is this: Would the exchange or the broker forcibly close this position before the trader has a chance to exit, or would the trader have complete control over when to sell and realize their profits?
I’m specifically interested in understanding:
Are there any regulations or risk management procedures that would trigger a mandatory closure on a highly profitable long options position?
Does the trader’s massive unrealized gain in any way give the broker the right to close the position?
Any insights into the mechanics of handling such an extreme but theoretically possible scenario would be greatly appreciated.
Common sense says a broker’s risk arises only when a client doesn’t have enough funds to meet obligations. In this case, since the person has already paid the full option premium upfront, there’s no margin risk and therefore, no RMS or regulatory trigger to square off the position.
Only short options face forced closure due to margin calls. Long options, no matter how profitable, stay entirely under the trader’s control.
However, one thing to note is that if someone buys deep OTM or large quantities of options, it can attract regulatory scrutiny. Regulators may question the intent behind such trades, and in some cases, the account could come under review. If that happens, brokers might temporarily block or hold funds as per exchange or PMLA guidelines.
That said, the trade itself remains under your control and brokers generally do not have the right to close a profitable position.
The above applies to index options where there’s no physical delivery. But for stock options, it’s different. A position can’t be closed just because it’s profitable, but if an OTM turns ITM near expiry, it may be squared off due to physical delivery obligations if there aren’t enough funds or shares to settle.
Thank you for the reply, and the last part you mentioned about if Otm turn ITM there there is physical delivery obligation. Isn’t that mostly for stocks ? If I gone long puts on index let’s say bankifty or nifty there will be no such thing please correct me if I am wrong.