What happens if I don't square off my positions in options?

[ShubhS9]

@Alpha_AA

Index options are cash settled please clarify this means whatever our P&L is at expiry same with some charges and all will be there , but no huge debt like it happens in physicals settlement in stock, e.g. if index option buy/sell position expire ITM whatever intrinsic value it will have multiplied by quantity (e.g. BN 25 or 50 depending on lots) that will be are net loss + charges and all

Right, index options are cash-settled. ITM options will be settled at the intrinsic value and the difference between your buy/sell price and final settlement price will be your P&L.

@Alpha_AA

Also does CTM DNE thing applies to index options - even the slightest ITM (one stike ITM from ATM for CE and PE ) will also be cash settled in index? And ATM strike at expiry closing bell, will it be considered any intrinsic value or that also is treated like OTM i.e. worthless

CTM or DNE facility is only for Stock Options as those are cash settled not for Index Options.

ATM Option too will expire with some value. For example, 17500 CE, if Nifty closes at 17560 the intrinsic value of this option will be Rs. 10 and will be settled at this price, it won’t expire worthless.

[Walker]

I have a open short OTM CE position as of today’s expiry and it will expire worthless, will there be any charges or brokerage if I didn’t square off my position before the market close

[Chirag1]

for OTM expiry, it will be settled at 0. So no charges of any kind. Only if you square-off, then brokerage + the usual.

[ShubhS9]

@Walker

I have a open short OTM CE position as of today’s expiry and it will expire worthless, will there be any charges or brokerage if I didn’t square off my position before the market close

If the option position expires OTM, it’ll expire worthless and there will be no charges applicable.

[siva0]

@ShubhS9 ,Please correct me if I am wrong

5th may 17050 PE is trading at 108 as of yesterday and I Sold 17050 PE @ 108 and IV of 20

on 5th may if nifty closes below 17050 and assuming market price at closing is 200 and IV of 30.

and IF i didnt square off my Profit / loss according to you is 108 - 30 (IV) = 88 rs

or is it 108 - 200 = - 92 .

reply would be much appreciated.

[ShubhS9]

You are confusing Implied Volatility with Intrinsic Value, both are different things.

@siva0

on 5th may if nifty closes below 17050 and assuming market price at closing is 200 and IV of 30.

and IF i didnt square off my Profit / loss according to you is 108 - 30 (IV) = 88 rs

or is it 108 - 200 = - 92 .

If on expiry day Nifty closes at say 17000, the 17050 PE will expire with intrinsic value of Rs. 50 (Strike Price - Spot Price). As you have sold the option at 108, it’ll be settled at 50, and you will be in profit of Rs. 58 * lot size.

Would suggest you go through this module on Varsity for better understanding:

Options Theory for Professional Trading - Varsity by Zerodha

[Piddling]

If you are in a buying position then you will get shares and have to pay the amount to the broker.
On the other hand, if you are in a short position, you will need to receive the shares from his demat account or else those will be auctioned.

[SMIFS_LIMITED]

If you do not square off your position in option, then on expiry day if the option expires in the money then you will have to take compulsory delivery of shares of will have to give delivery of shares to the other party. This can result in massive losses to you. Thus, if you want to avoid such a scenario, then you need to exit your position before expiry.

[A_K2]

massive loss,how?

[Nidal]

For long CE ITM positions, you have to take delivery for the you must have around 7-13L margin (depending on the scrip) or else interest will be applicable on shortfall.

For long PE ITM positions, you must give delivery. For that you must have equivalent stocks in your demat account or else auction will take place where the shares could be purchased by exchange on your behalf for upto +20% of the LTP.

For index FnO, its cash settled so above is not applicable.

[A_K2]

Thanks, Nidal!!!
Okay…I thought there are any other unknown charges …but if a person has shares or money then He might avoid squaring off. There would be normal expenses other than .25% brokerage.

Can you help me with one more thing?

At the time of expiry, Do we need to calculate the benefit of option square off vs taking/giving delivery.

I heard people don’t take/give delivery, but in my case (Asian Paints MAY Put 3400 at 400 premium ), it seems I should give delivery rather than squaring off put option.

Am I missing something?
Thank you,AK

[Nidal]

What is your buy price for your 150 shares of ASIANPAINTS?

And what premium did you pay for the put?

[A_K2]

Originally, I bought it at 3137. but I hedged it at approx 3000. Premium is 404.70.
The lot size is 150 shares.
so the total premium paid is 60,705.

[Nidal]

For hedging you could have sold 3400CE instead of buying 3400PE.

For your situation, there is time decay in your option premium.

Also you have lost 90₹ per share for your shares in demat account.

In total its a loss of 195₹ per share for you as of now ( decay in premium + loss of stock )

On expiry there will be Minimum ₹141 loss for you per share if you hold it to expiry and its ITM.

You will be at cost if Asianpaint closes at 3541₹

So pray that it closes above 3541₹

[A_K2]

First of all, thank you for your time & suggestion!

I am trying to understand hedging by call yet.
if I would have sold the 3400CE…I guess I would have received only 10-20 per share.

I was already at a loss of 140-145 (3147-3000) when I hedged it. Now its price is 3046. and right now I am losing at 55 INR on the option except charges. Also, I shorted Asian Paints a few times and t covered some losses.
The shares should be at 2900-3100 at expiry.
however, I am concerned about should I square off the option or give delivery ? or what’s the price point of the option premium above or below I should square off/give delivery?
I am not clear about the exact charges and calculations.

[Nidal]

@A_K2

if I would have sold the 3400CE…I guess I would have received only 10-20 per share.

Or you could have shorted 3100CE or 3000CE (which would be approx 200-250Rs. premium). So you would have got the entire premium for yourself.

@A_K2

The shares should be at 2900-3100 at expiry.

Consider it expires at 2900Rs. In that case, you will have to give delivery which will cost you 0.25% brokerage and also you will lose:

Rs. 137 per share.

[A_K2]

so will it be automatic delivery of my holding stocks against my bought put option or do I need to do anything?

[Nidal]

It will be taken care by the exchange.

You just have to keep 1 lot of shares available in your demat account on the day of expiry.

[A_K2]

Hey,
I was not clear so I made a table to compare physical settlement vs option square off.
is it right or I am missing something?

Assumption-

• Spot price is 3100

• Diff option price 200-325

If I go for option square off-
I have to

bear some Premium Loss

+++
& I will get to keep my stocks-

If I go for Physical Settlement-
I will have to

---

Pay Extra Charges-.25%+GST
bear the total premium loss

+++
& I will get 3400 per share(strike price)

Total Premium paid-404.7	Physical Settlement	Option Square Off	Option Square Off	Option Square Off	Option Square Off	Option Square Off	Option Square Off
		1	2	3	4	5	6
Gain
Price-Spot/Strike Price	3400	3100	3100	3100	3100	3100	3100
Loss
Extra Charges-.25%+GST	10.30	0.61	0.61	0.61	0.61	0.61	0.61
Premium Loss	404.7	79.7	104.7	129.7	154.7	179.7	204.7
	2,985.00	3,019.69	2,994.69	2,969.69	2,944.69	2,919.69	2,894.69
Profit/(loss) in option square off		34.69	9.69	(15.31)	(40.31)	(65.31)	(90.31)
Assumption
Option Selling Price		325	300	275	250	225	200

[Walker]

I want to analyse a mutual fund where can I find the past values of the benchmark TRI