Hello, someone long in a stock PUT option and it was expired ITM and he can’t sell that option due to illiquidity.
PUT option buyer which is expired in ITM, needs to deliver the shares to the buyer.
What will happen now?
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If the customer doesn’t have the stock and fails to deliver, it will be treated like short delivery. Stock will be bought in auction and then delivered.
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Since the user purchased options, can he choose not to exercise his position and lose the premium instead? Theoretically, options buyers risk should be limited to the amount of premium paid. In the above scenario, it is much more due to short delivery.
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Unfortunately no, all stock options are European, which means they are physically settled if expired in the money. Also post October 2021, SEBI/Exchanges have withdrawn the Do not Exercise (DNE) facility for options which are close to the money (CTM) which existed for the last few years. DNE was introduced because earlier in India we had this issue of STT being charged at 0.125% of contract value and customers would lose a lot more in STT than the premium itself on exercise. I am actually writing a post on this, will share it here in the next couple of days.
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Does it mean that an option is not an option anymore?
PE is not an option to sell it’s an obligation which sounds very wrong to me. Why would we call it an option then?
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This is the definition of an option contract….
“ The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price).
The seller (or “writer”) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right”.
From this chapter in varsity…
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It remains an option until it is exercised. But forced exercise is an issue. Hopefully changes will be made.
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I think we are saying the same thing just in different wording.
Even if they are called options it doesn’t feel like an option because:
- Before expiry, we cannot exercise them
- After expiry, we cannot NOT exercise them
I read about the guy who HINDALCO puts. Looks like an accident waiting to happen every expiry. I myself never wait for auto square off or hold stock F&O till expiry. But one unsuspecting day this could have happened to even the best of people and wiped off his whole savings.
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It can’t be squared off if there’s no liquidity and as per the current rules, it will be exercised if it is ITM on expiry.
@RadiO_EPISODO, as @Suyash.K said, if there is no liquidity, you won’t be able to square-off your position and you will have to take delivery of underlying shares.
Coming to your second query:
ITM options get exercised but expire at 0 value. The strike price of the contract will be the buy/sell (average) price of the stocks and difference between the average price and CMP will be your P&L.
Brokerage of 0.25% of the physically settled value will be applicable and STT will be applicable at 0.1% on the contract value.
You can check out more details here.
What’s the problem with cash settlement? Why’s it not in the list of potential fixes?
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Hi,
Will this approach work? If he couldn’t sell his itm put option on the last day of expiry then he could buy same lots of call option for the same strike price and same expiry. So both will get cancelled out and no physical delivery would be required. And going forward avoiding buying/holding stock options near to expiry.
Let’s say someone had Hindalco PUT 450 one lot 1075 quanity. Let’s say Hindalco exipires at 440. So its 10 rupees ITM.
now if the person doesn’t have Hindalco shares in his account. How will various charges accrue to his account.
to start there is a profit of 10*1075 which is 10750 rupees, So will he loose the entire profit, or after short fall penalties etc., will he still be making profit.
??
Buying options is not allowed on last two days of expiry. But to net-off your obligation, you can take position in Futures.
Obligation for Short Put (take delivery of underlying shares) will be netted-off if you have Short Futures position (give delivery of underlying shares).
Here’s how net-off scenarios work:
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Thanks a lot 
So if one has bought Hindalco 450 put 1 lot (1075 quantity). And one has also bought Hindalco Future 1 lot. Both expire on say 31st Dec.
So there will be no exchange penalty and no margin penalty in this case, even if put option expires ITM, and there are no shares to deliver in the account??
Seems like it. If we look at closing price of hindalco future on 30-dec-2021, underlying spot price was 449.65 but future close value is 452
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