What happens to Stock Strangle on expiry?

[Younus_Farveaz]

Assume I sold the below Reliance Straddle

• 2100 PE @ Rs. 12.5
• 2200 CE @ Rs. 43

The Margin Requirement for this straddle is according to Zerodha is

On Expiry, Assume the spot price at expiry is 2210.

1. What happens to my margin requirement on expiry?
2. If I do not square up my positions, how do the settlement happen? (I read about physical settlement and will this be netted off?)
3. Does hedging this with a buy leg on both sides help in margin reduction / settlement?

[ShubhS9]

@Younus_Farveaz

What happens to my margin requirement on expiry?

On expiry day, for short option position, the margin requirement will increase to 40% of the contract value or SPAN + Exposure margin (whichever is higher). Though you’ll continue to get the margin benefit.

@Younus_Farveaz

If I do not square up my positions, how do the settlement happen? (I read about physical settlement and will this be netted off?)

For your physical settlement obligation to be netted-off, both legs should expire ITM. If one expires ITM and other OTM, it’ll be physically settled and depending on Option type, you’ll have to give or take delivery of underlying shares.

@Younus_Farveaz

Does hedging this with a buy leg on both sides help in margin reduction / settlement?

Yes, taki Long Option position will give you margin benefit. However, for settlement, again it depends on where the legs expire, as explained in point #2.

[Younus_Farveaz]

@ShubhS9 Thanks for your reply!

I understand why most sellers close their position a week before expiry. The hedges are basically useless when it comes to settlement as they mostly expire OTM.

@ShubhS9

For your physical settlement obligation to be netted-off, both legs should expire ITM. If one expires ITM and other OTM, it’ll be physically settled and depending on Option type, you’ll have to give or take delivery of underlying shares.