Stock options buying - physical settlement

General
1

Assuming I bought reliance 2000 CE when reliance is trading at 2000.

The price of the call option is 100rs. Now on expiry day, reliance expires at 2200. Now, my long option is ITM, so I would get 100rs as profit on my 100rs investment. I want to know what if I let this option expire as it is ? The exchange would settle it for me right and credit the profit to my account ? Is physical settlement applicable for long options as well ? Will at any point be I charged more than the premium X lot size ?

2

If your Option position expires ITM, it’ll be physically settled. Be it Long position or Short position.

As you’re holding ITM Call Option, you’ll have to take delivery of underlying shares. The shares will be delivered to you at the Strike Price you hold, ie. 2000 CE.

Yes, for Long ITM Options, exchange blocks physical delivery margin as a percentage of applicable margins (VaR + ELM + Adhoc) of the underlying stock which is levied from expiry minus 4 days.

This support article explains about physical settlement in detail.

3

Thanks for replying. The article is very technical and has no examples. In the above case,

Reliance lot size is 250. The 2000 call option I bought is for 100rs, and now it is ITM since reliance is trading at 2200. So how do I calculate this : percentage of applicable margins(VaR + ELM +Adhoc) - 70% on wednesday.

4

On Wednesday and Thursday of the expiry week 50% of the contract value will be blocked. This also covers the exchange stipulated margins mentioned above.

To know how the calculation works, you can refer to this post:

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5

yes basically whether u are naked long or short physical delivery applies if its ITM and profit will not be credited because now its physically settled not cash settled so u have bought 1 lot of reliance 2000ce so u will get 1 lot of reliance shares priced at 2000 into ur account for that margin requirements etc etc is required ,so the best thing is dont hold stock options on last week of expiry

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6

Thanks for your answer. So when backtesting a strategy itself, probably we have to exclude last week of expiry. Index options are not physically settled right ?

7

Yes better exclude last week even because the gamma is high , so better not to trade stock options in last week , if u don’t get how gamma effects https://youtu.be/e4AwZ-dAoQ4. Watch this video by p r sundar

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8

Irrespective of the long or short position, if the option position expires in-the-money or ITM, it will go for physical settlement.