Suppose, if MRF closed at 60500 on expiry, and I purchase 60000 Call and sell 61000 Call. So, on expiry how will these calls be settled. Will both get exercised, i.e. I will have to purchase 10 shares of 60000 call and sell 10 shares of 61000 call so net effect be zero.
Or only 60000 call will be exercised only as it is in the money and 61000 will expire worthless.
Can I stop exercise of ITM by selling OTM call?
Only 60000 Call will be exercised as it is ITM and you will receive 10 shares of MRF (50% contract value should be available in your account on last two days of expiry). 61000call short will expire worthless as it is OTM.
Learn more about physical settlement here https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
I would suggest also checking the chapter on Physical settlement on Varsity to understand this concept better. Some important points from that chapter -
Only ITM options will be physically settled, if the option expires OTM, they expire worthlessly and there won’t be any delivery obligation.
24.5 Netted off positions(subcategory)
If you have multiple positions of the same underlying for the same expiration date and they form a hedge, depending on the direction of the trade, they will be netted off.
1st Leg 2nd Leg Long Futures Short ITM Call / Long ITM Put Short Futures Long ITM Call / Short ITM Put Long ITM Call Long ITM Put / Short ITM Call Long ITM Put Long ITM Call / Short ITM Put Short ITM Call Long ITM Call / Short ITM Put Short ITM Put Short ITM Call / Long ITM Put For example, if you have an SBI June long futures contract and long ITM Put of strike 200(SBI spot price at Rs 180), the long futures position will lead to a take delivery obligation and the long put option to a given delivery obligation. This will be netted off for your account and there won’t be any physical delivery obligation.
24.6 Margins
When you are trading in the F&O segment, for futures and short options, you will require to maintain only the margin amount in your account, for long options, just the premium required to buy. However, this changes with the physical settlement mechanism, where you are required to bring in 100% of the contract value to take delivery of the contract or bring in stocks to give delivery(depending on the direction of your trade). Brokers introduce additional margins when such positions get closer to expiry.
Hence your following assumption is correct -