What is compulsory delivery rule in stock options?

F&O
1

Yesterday I went to buy axis Bank Jan OTM option but I got a message that I can’t buy that option because of some compulsory delivery rule and advised me to buy next month option instead. Can anyone tell what that rule means and all of a sudden why I am not allowed to buy them one day before expiry? Seems a bit unfair to me.

2

Stock Options which expire ITM, are compulsory physically settled, i.e you will have to compulsory take delivery (Long Call Option, Short Put Option) or compulsory give delivery of underlying shares (Long Put Option, Short Call Option). For more information you can read this.

3

But why is it allowed on other brokers and not Zerodha?

4

Didn’t understand your query, can you elaborate?

5

On Wednesday I wanted to buy Jan axis Bank OTM call option but was denied due to this rule? I was asked to purchase next month option.

6

This has been explained here.

7

That I understand but why do other brokers allow then? They don’t have that risk?

8

Different brokers have different risk management policy.

9

Hi Shubh
Isnt the whole meaning of Options is that if i am the buyer then i have a right to not excercise it.
what happens in this scenario.
I have a call option with strike price of 100 and the underlying stock went upto 500, so basically i am in profit ,but i am not able to square off my position because no Seller is ready to buy it back at such a huge premium.
Now to buy it back i need to have a margin of 10 lakhs in my account, which i dont have. So what happen in this case , whether i have to lose all my( profit+premium) and also bear the cost of exchange penalty?

10

As a buyer of Option when you leave your ITM position to expire, you’re turning your right into obligation.

In this scenario where you’re holding Call Option, you’ll have to take delivery of underlying shares and will need to have amount equal to Strike Price * Lot Size in your account. Not having sufficient funds will result in your account going in debit balance. You are required to bring in funds if your account results in a debit balance after physical delivery, failing which the delivered shares will be liquidated to make good of the debit balance. Interest will be charged at 0.05% per day on the debit balance in the account.