Stock Option physical settlement

General
1

Let’s say I write 1 Lot of SUNPHARMA 1450 CE at 30Rs premium. March 2024 expiry and
I currently hold 700 shares of SUNPHARMA at 1300Rs/ stock.

Net credit = 700(lot size)* 30 = 21000 Rs

Assuming, SUNPHARMA touches 1500Rs/stock , 1450CE expires ITM.

For seller perspective, I’m obliged to deliver 700 quanties of SUNPHARMA at 1450Rs/stock.

However, I bought this stock at 1300Rs and now I’m selling it at 1450Rs,
So, the net credit is profit of 105000 [700*(1450(sell)-1300(buy)] + 21000 (700*30premium ),

Is my understanding, right? or Am I overlooking anything here.
I’m purposefully not considering the money that would have been made by selling 700*(1550 current price) as a loss factor and satisfied with selling at 1450 as per contract.

Appreciate team’s support to clarify.

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2

Yes,your understanding is right.
Only the loss is based on current market price you could have made 1500(spot closing)-1450(strike)=50*700=35000. As already premium credit is 21000, overall loss would be 14000 as you preferred selling the shares via physical settlement.

Kindly note brokerage of 0.25% of the total value of physical delivery is charged due to the additional effort and also all physically settled contracts, like stock delivery trades, will carry an STT levy of 0.1% of the contract value for both the buyer and the seller of the contract.

Read more about physical settlement policy here.

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3

thank you @Ragavendran_M for the quick support and clarification.

Does the same assumption hold for writing PE option. assuming , PUT writer to willing to take delivery of stock.

same example
Write 1 Lot of SUNPHARMA 1450 PE at 70020 = 14000 credit
SUNPHARMA reaches 1400 on March expiry.
PE Writer needs to take delivery of 7001450 Rs/stock. whereas market price is 1400,?
PE writer expects stock to bounce after a period and hence not worried about current price.
in this case, the PE writer can keep the premium of 14000 and needs to take delivery of stock by spending 1450700 = 9.8 Lacs.
Theoretically the loss could be 700 (1450-1400) = 35000 if PE writer takes delivery and sells it soon. (assumption made: stock remains around 1400Rs with no big deviation)
Is this right understanding, right ?

Please ignore if there are too many assumptions made, I’m just trying to correlate my understanding with experienced people, so as not to take any false understanding.

Thanks in advance.

4

Yes,your understanding is right.

5

thank you once again.

Adding one more question to the existing thread.

reading through the link What is Zerodha's policy on the physical settlement of equity derivatives on expiry?

“Taking or giving delivery of the entire contract value worth of stocks requires either full cash or stocks in the Zerodha account post-expiry.”

If client already holds the stock worth the contract size, will there be an increase in margin,
close to expiry if CE option is turning into ATM/ITM ?
[apart from the original margin blocked during the contract entry]

6

Yes, if you have having short option position, on expiry day margin will be increased to 50% of the contract value or 1.5 times NRML margin (whichever is lower) irrespective of stocks available in the demat account.

7

@Ragavendran_M sir.
Can you please guide about the following scenario?
Suppose I have 1 lot futures short and 1 lot stock pe short?
I suppose these positions will net off if pe goes itm…
But I want to understand the increased margin requirements near expiry…
I have read the physical settlement link…
I suppose the margins for both legs will separately increase…
Because I am short pe, the margin requirements will increase only on expiry day for this pe leg?
What will be the increased requirements for futures short leg? Expiry day or expiry week?
Can you please guide in detail?
Thank you

8

Both option short and future margins will increase only on expiry day.

9

Thank you…
So, as per my understanding, margins increase in expiry week only for futures and options long…while margins increase only on expiry day for futures and options short…
Am I correct?

10

Only for option long margin will increase on expiry week. For futures (both long and short) and option short it will increase on expiry day.

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12

@Ragavendran_M sir.
Good morning.
I have one more query.
Suppose my futures short and pe short are netting off on expiry day, what will be the total charges I’ll have to pay?
I see the brokerage is 0.1% of contract value…
That means 0.1+0.1=0.2% for both legs
+Stt?
Can you please explain with example, say sunpharma 1 lot futures short+pe short net off scenario?
I just want to know how much it will cost total if I let it expire VS square off even if pe leg is illiquid?
Thank you once again.

13

Brokerage will be 0.1% of total turnover.
Sun Pharma’s contract value for One lot is around 1092000. Overall turnover in this case is 2184000. So brokerage will be Rs.2184.

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14

What about the loss in CE option sold ? Please help me understand.
@Ragavendran_M @arunss90 please do help me in understanding

15

@Ragavendran_M
If a “short index option” expires ITM or slightly ITM or even ATM with some intrinsic value, will any brokerage or other charges will be applicable for settling it.
Eg: if I write a nifty option at say ₹50 and say it settles at ₹45 or ₹55. Will in any case brokerage or other charges will be levied for settling it

16

Yes it will be levied.