Chapter 06 of 6 · 4 lessons · Concept, Lab
Mechanics
The plumbing. Unremarkable until an expiry lands on a position badly, at which point it is the only thing that matters.
The plumbing of options is unremarkable until an expiry lands on a position badly, at which point it is the only thing that matters. This chapter covers the four places that happens: settlement, taxation at exercise, daily mark to market, and margin.
Two of them are asymmetric in a way that catches people out. An index option settles in cash against the closing level and nothing changes hands, but a stock option settles by delivery - so an in-the-money contract at expiry becomes an obligation sized by the full contract value rather than by the premium paid for it. Securities Transaction Tax behaves the same way: charged on the premium when a position is sold, and on the settlement value when an in-the-money option is left to be exercised.
Rates and parameters are deliberately not quoted in these lessons. Statutory charges and SPAN margin parameters both change, and a page that hard-codes a figure is wrong the moment it does without giving any signal that it has. What is described here is the mechanism; your broker's contract note carries the number that actually applied.
By the end of this chapter
- Know which of your options settle in cash and which become a delivery obligation
- Avoid the expiry-day charge that can exceed the gain on a barely in-the-money contract
- Follow how cash actually moves through an account while a position is open
- Explain why a margin requirement can rise on a day the index did not move
The lessons
In order, though each one stands on its own.
Common questions
What happens if I forget to square off an in-the-money option?
It is exercised. For an index option that means cash settlement against the closing level. For a stock option it means an actual purchase or sale of the shares at full contract value, and Securities Transaction Tax is charged on that settlement value rather than on the premium.
Why did my margin requirement rise without the market moving?
SPAN margin is computed across a grid of price and volatility scenarios, so a rise in implied volatility increases the requirement on written positions even when the index is unchanged. Exchanges also raise margins ahead of events and through expiry week.
Can I lose more than the premium on an option?
Not as a buyer - the premium is paid up front and is the maximum loss. As a writer, yes: the obligation is open-ended beyond the breakeven, margin is blocked against it, and losses are settled in cash daily rather than at expiry.
Written and maintained by MarketCue research
How these figures are produced
Every price on these pages was traded on the exchange and is read from our own option-chain capture, which records the NIFTY and SENSEX chains once a minute through the session. Each page names the session its figures come from.
Figures that a model produced rather than the market — the Greeks, implied volatility — are labelled as model outputs wherever they appear, and never presented beside traded prices without saying which is which. The pricing is checked against published reference values on every change.
Where our own data cannot support a claim, the page says so instead of generalising. MarketCue is not a registered investment adviser, research analyst or broker under SEBI regulations.