What happens if the option contract is not squared off on the expiry date? (2024)

FAQs

What happens if the option contract is not squared off on the expiry date? ›

If an options contract position is not squared off before the expiration date, the trader can lose the total premium and any taxes and brokerage charges paid. You can utilize leverage to make purchases or sales during the trading day with an intraday (MIS/CO) order (up to 5 times the money in your account).

If you do not sell an index option on expiry, if it is OTM, then it will expire worthless and if it is ITM, the system will automatically suqare off the position and you will get the premim realized from sale in your account.

In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don't have to pay anything else.

If you don't act, the contract will reach its natural conclusion, through either cash settlement or physical delivery, depending on the contract's terms. If it's a cash-settled contract, the settlement will be calculated based on the market prices at expiration and credited or debited to your account.

Square off is a critical concept in options trading, where it means closing an open position by taking an opposite position to the existing one. For instance, if you've purchased a call option, you can square off by selling the same call option with the same underlying asset, strike price, and expiry date.

As an option approaches expiry, the contract holder must decide whether to sell, exercise, or let it expire. Options can be in or out of the money. When an option is in the money, it can be exercised or sold. An out-of-the-money option or an at-the-money option will expire worthless.

If you sell and don't square off before the end of trading on the same delivery, you need to give delivery of shares. If you cannot give shares, it becomes short delivery. Short selling in delivery can have a steep cost as in such cases the stock could be for auction and you may end up bearing a huge loss.

Once an option reaches its expiration date, it either gets exercised if it is ITM or expires worthless if it is ATM or OTM. There are no provisions for extending the expiration date for these types of options.

Options expire at what's known as the “closing bell”. That's when the stock market closes and all trades are finalized. After that time, no more options contracts can be traded and any remaining positions will become worthless – they'll simply disappear from your account.

When expiration hits, the investor has a few choices, including selling the option, exercising it, or letting the contract expire worthless. Keep in mind, though, that if the option is in the money (even by a penny), the broker automatically exercises it. That is, unless, the option holder instructs them not to do so.

How to sell options on expiry day? ›

Option Expiry Day Strategy Meaning

Within options contracts, two fundamental types prevail: call options and put options. Call options empower the holder to purchase the asset on or before the expiry date. Conversely, with put options you have the right to sell the underlying asset before or on the expiry date.

Yes, selling options on expiration day is possible. This is true both whether your question concerns the mere sale of an option you own or whether you refer to the shorting of options in general as a means of directly making money on expiry day. Yes, you can also exercise a call option before expiration.

Eventually, the time value in case of all the 3 options will eventually tend towards zero as expiry approaches. While the OTM option and the ATM option itself will have a zero value, in case of ITM options the option premium will still be positive due to the existence of intrinsic value.

So if the owner doesn't exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price. There is also an upfront fee, called a premium, that gets paid when a trader enters into an options contract.

Conclusion. Knowing when an option will expire is crucial before making any trade on expiry day. An options contract has no further effect after its expiry date. If your contract is profitable when it reaches maturity, you risk having it exercised.

If the stock trades below the strike price, the call is “out of the money” and the option expires worthless. Then the call seller keeps the premium paid for the call while the buyer loses the entire investment.

If the index options are bought:

Brokerage will be charged on both sides, i.e. when the options are bought and when they are settled on the expiry day. Contracts expiring OTM - OTM option contracts expire worthlessly. The entire amount paid as a premium will be lost.

Once an option reaches its expiration date, it either gets exercised if it is ITM or expires worthless if it is ATM or OTM. There are no provisions for extending the expiration date for these types of options.

If an option expires in-the-money, it will be automatically converted to long or short shares of stock in the associated underlying. Long calls are converted to 100 long shares of stock at the strike price. Short calls are converted to 100 short shares of stock at the strike price.

The system will auto square off all positions on options expiration unless a trader has opted for physical settlement. In case of physical settlement, the trader should either pay the full amount for the shares and receive delivery of the same, or deliver the shares depending on the position taken.