Stock Option settlement

Trading
1

Is there a thumb rule to know any given strategy will end up with physical settlement of stocks ?
(I do see few threads on some strategies )

2

It all depends on where the Options expire, ie. ITM or OTM.

If one leg expires ITM and other OTM, there will be physical settlement. While, if both the legs expire ITM the the position will be netted-off.

You can refer to the below table to understand the net-off scenarios, and this support article for more information about physical settlement.

TH4JQCYS_Screenshot_208

3

Thanks @Shunh59

I did come across this as well ; but can I make a decision simply by looking at the payoff graph ?
(OR can @Sensibull add a feature that can indicate this ?(I suppose retail traders will be interested)

for ex :

image
image821×265 14 KB

4

You don’t need payoff graph to understand if position is going to expire ITM or OTM.

All you have to do is just take a look at spot price can then look at your Option positions, this will give you idea about moneyness of your Option positions.

5

Thanks @Parth111 ,

Can we say :

  • all OTM legs (short/long) will not result in physical settlement ?
  • all ITM legs (short/long ) will not result in physical settlement if we have a second leg to “cancel” ?
6

Yeah! OTM means option will expire worthless, no physical settlement.

Right. You can refer to the table shared above by @ShubhS9. That explains everything.

7

Will the margin blocked change /increase in case of net-off scenarios as well (near expiry) ?

8

Yes, it will increase. If your long option position is ITM, the exchange blocks physical delivery margin from expiry minus 4 days, if it is OTM then the margin requirement won’t increase.

Also, for short option position, on the expiry day, margins will increase to 40% of the contract value or SPAN + Exposure margin, whichever is higher. You can check out the article shared above for more information.

9

Thanks again !

From margin calculator , combined margin for the strategy :
image

For the short leg :
image

Now , near expiry/any given day for that matter , how do I know what is the margin I need to keep ?
Is there a space where I can give my current positions and get the required margin info ?