When I am trying to selling far OTM options. It is saying it is ill-Liquid option. And I have to enable TOTP to put order. Well I know TOTP is form of authentication.
But question is what is risk if I am selling ill-Liquid PUT or CALLs?
If my option expire OTM then I definitely in benefit.
If my option expire ITM then I may suffer loss. (but for stock going from OTM to ITM ill-Liquid option may become liquid too, i guess)
Is there any other risk for option seller?
Thank you. From your article basically what I understood is that for illiquid stocks one should deal with prices roughly around theoretical value calculated by black-scholes formula.
Well All that is good.
I want to understand for my particular case. ie. If I SELL (only I am talking about selling) illiquid CALLS or PUT, will I face any penalty, default if the option remain illiquid and contract expire. Will I be subjected to any penalty case? Assume I am ready to give delivery or ready to buy the stocks if the sold call/put expires ITM.
I mean to say can there be a situation that I am stuck after selling ill-liquid call/put and dont find any buyer and suffer unknown losses due to that. (market loses I understand). Unknown loses are something which I will suffer incase for my sold ill-liquid call/put I could not square off. etc
Except illiquidity risk and if you are ready to handle market risk I guess it’s okay to short.
Also on last two of expiry margins will double for short options so one should be ready for that at Zerodha.
From OTM to ITM, you will have to go through the M2M which you won’t be able to handle. 
Please explain. What you mean?
I understand that when it will go from OTM to ITM, the premiums would increase and as a option write I will start seeing a good loss. But that is ok. That I can still see and take action on. But is there any unknown risk which i may be missing?
If its illiquid the bid ask spreads could be wide(even ridiculous) and your option prices can be erratic until expiry.
That is still under my control. One way, I can use black schole formula to get the correct pricing and will take position only if it is sensible price.
My question was can there be a situation where I am stuck. Because option writing is a very risky thing and unlimited losses can wipe you out. Dont want to get into that.
Eg. Noone thought of -ve Crude oil futures before Covid. And it was unmanageable scenario even for experts.
I am looking if such a kind of risk is present in dealing with illiquid options writing. Can prices go negative? Can I be lead to exercise option at -ve values?
Umm, possible risk
If the stock moves rapidly, and if the option remains illiquid, you could find it difficult to do a reasonable square off or do prudent adjustments, Like in a train with no stops.
Its simple, In illiquid options, if the ask/bid is excessively wide, some desperadoes might settle for it in panic. That can affect option price.