Squaring off before expiry ITM BUY options

if I bought a ATM stock option. and after some days if it goes to deep ITM where there are no buyers. If I am in profit and don t want to hold till expiry then can I sqare off my winning trade. if yes, how it will be settled. please clarify.

If it is deep ITM and there are no buyers, you won’t be able to square-off your position. Upon expiry, depending on which Option you hold, you’ll be obliged to take delivery of underlying shares (Long Call) or give delivery of underlying shares (Long Put). You can learn more about physical settlement here.

In the physical settlement document there is a confusion between buyer and seller. buyer also need to take physical delivery. please take following example:
if SAIL (illiqud stock) CMP: 72.80 RS

and at the end of 25 March if above said 9 rs strike trading at (deep ITM) 15 rs. where due to illiquidity before expiry if I could not sqare off and let it expire. Then will I get 6 rs (15-9) * lot size.
Thank you

For example, say you have taken long position in 72 Call Option and SAIL expires at 85.

Your 72 Call Option will expire ITM, and as an Option buyer, you’ll have to take delivery of the shares.

Now, even though the CMP of SAIL is 85, you’ll be delivered shares at Strike Price ie. 72, which will be your buy average for this shares and difference between this and CMP of SAIL will be your P&L.

Would suggest you to read this module on Varsity for detailed information on how Options work.

Hi Shubh,
In the above case what happens if the buyer doesn’t have enough funds to take delivery of the ITM option.
1.) I read in a article that the brokerage has to deliver the shares to exchange irregardless of user having fund or not.
2.) If the above is true, then user has to bring in funds and the brokerage will charge a intrest untill the fund is added.
3.) Can’t the user or brokerage settle the above situation by selling the shares and pay the amount.

If all above is too confusing or wrong, can you please explain with above case of SAIL, how will it result if user does not have fund to take delivery of deep ITM?

If you don’t have sufficient funds to take delivery, your account will result in 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.

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Just a thought, if you bought a ATM stock option - You were able to buy it because there was a seller for it.

The seller of the stock options will be in loss when the strike goes Deep ITM.

Technically speaking you will always have someone to sell it back to because the sellers also need to cover(buyback) their position to close because he is in loss due to strike goes Deep ITM.