Hi, Assume I don’t square off my Options position for following ITM options. what will happen?
a. If I have bought ITM calls option. Then will I automatically get delivery of stocks (assuming I have cash margin available in account)? Also what will be my buying price? Will it be same as strike price? Will I have to pay any brokrage/STT on option squared-off or any extra settlement charges other than regular stock delivery purchase?
Also if I dont have cash margin available then will the delivery of stock take place or automatic square off will happen? is there any penalty in that case?
b. If I have sold ITM CALL options. (Assuming I have same number of stocks available in my holdings). On expiry will I face any penalty or it will be simply settled against the stocks I am holding? Selling price of stocks settle would be?
Yes, if your Option position expires ITM, as buyer of Call Option, you’ll have to take delivery of underlying shares.
Shares will be delivered to you at the Option Strike Price you hold, the same will be your buy average.
You can learn more about physical settlement and charges associated with it here.
If you don’t have sufficient funds then your account will result in a debit balance. You are required to bring in funds if your account results in a debit balance after physical delivery failing which the delivered shares will be liquidated to make good of the debit balance. Interest will be charged at 0.05% per day on the debit balance in the account.
Upon expiry, as you are holding ITM Short CE, you will be obliged to give delivery of underlying shares. You need to have shares equal to lot size in your account for delivery or it’ll result in short delivery. You can learn more about short delivery here.
The selling price will be at the strike price you’re holding.
If I unpledge on last thursday before 2pm, then do I have to provide the other 50% cash margin also in place of the collateral margin that I had for pledged stocks?
ie. From beginning I am providing 50% cash margin and I am getting 50% collateral margin against stock. But now on expiry day if I unpledge it, then obviously my collateral margin will go away same time (am i correct). So then I have to provide 50% more cash margin?
To give physical delivery, you’ll have to unpledge shares on Wednesday, so they will be available for settlement on Thursday.
Once you’ve unpledged the shares, you won’t be receiving collateral margin against them. So, yes, you’ll have to bring in funds if you don’t have sufficient margins.
Thank you very much. But few confusion I still have.
How come the other brokers promise to manage this situation?
ie first of all they dont even ask me to pledge or unpledge. They do it themselves. That I can understand. Its both good and bad.
But how come they dont even ask for extra margin on Wednesday. Surely they would be unpledging the stocks in wednesday, so that they can be settled on thursday? assume they does that then why do they dont ask for extra margin requirement that is created.
This is pretty bad system. Covered call shouldn’t require any more margin if I already own that many shares. Having additional funds beats the whole purpose of doing covered calls.
I used to think the same at first. But, if you look from the pov of the national exchange, what guarantee will they have that the option seller will not sell his/her holding until he/she is holding on to the short ce? Hence, a margin becomes necessary for this guarantee.
In that case, when the trader sells holding, margin requirement will show that amount. Similar to how it happens when you have sold options with hedges. If you close your hedge before closing option selling position your margin requirement will increase.
I may be wrong, but this is what I think - Margin are only for derivative contracts and not for equity. Only an option can act as a hedge for another option. If you have shares in your account and you sell a CE or buy a PE believing that your shares are a hedge, the exchange would still think it as a naked option. This is because that equity is not binding to that option. (For eg - you can still pledge that equity, get margin, trade intraday, and then unpledged it). Hence separate margin is required for that derivative contract