Trading in options is very different from the cash market, especially when it comes to the settlement of the trade positions. Options contracts are derivatives based on underlying securities like spot indices or stocks. There is a particular time and date of ending the contracts, that’s on the expiration date designated by the exchange as per the terms and conditions of the settlement.
If you trade in options, you need to understand the settlement process and expiration dates that come weekly or monthly for different contracts. Let’s find out about options, and what is the settlement process or expiration procedures of options in Indian stock exchanges.
How Option Trading Works in India?
In option trading, buyers and sellers enter into a contract to buy or sell the call or put option of a particular underlying security of a particular strike price. An option buyer pays the premium and has the right to buy or sell the option before the date of expiration.
While, on the other hand, option sellers receive the premium paid by the buyer with the obligation to sell the option as per the request of the option buyer. However, if the option buyer exercises the contracts, it will expire on the expiration date or contracts can be sold in the market if the option buyer earns a profit and exits from the trade position.
Here, option seller either calls to wait for option expiration and if the option buyer exercises the contract, then the option seller has to fulfil the obligations as per the contract. Most of the contracts are expired or squared off before the date of expiration.
Option Settlement in India
In option trading, the contracts are expired or positions are closed before the expiration date. It totally depends on the trader to square off his trade position before the date of expiration otherwise exchange will automatically settle the contract on behalf of the trader.
In India, both stock and index options are European-style options, which means they can be exercised at the time of expiry, hence the option settlement in India takes place by exercising the contract at the time of expiry. If the contract is in-the-money, it will be exercised automatically, or the option holder can choose to exercise the contract at the time of expiry.
Types of Settlement in Options
The settlement process is organized through intermediaries like your broker, exchange, clearing house and depositaries as per the types of option contracts.
However, at the time of option settlement, there are two options – physical settlement and cash settlement. The physical settlement options are American style, and most stock options are physically settled. While, cash settlement options are usually European style, and are settled automatically at the time of expiration if positions are in profit.
Physical Settlement: In the physical settlement method, the option holders exercise the contract and take physical delivery of the stock. The call option buyer takes the physical shares of the underlying security, while the option seller delivers the physical shares of the underlying security. However, the physical settlement is not applicable in index options, it works only in stock options.
Cash Settlement: In this settlement procedure, no physical delivery of shares takes place, instead the settlement is done by transferring the profit or loss into the trading account of the eligible parties. The cash settlement method is mainly applicable on the option index where physical settlements of shares are not possible.
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Option Settlements Procedures:
Index Options: Cash Settlement
Stock Options: Physical Settlement
Long Index Options Expire ITM: ITM option contracts are automatically exercised on expiry.
Long Index Options Expire OTM or ATM: OTM and ATM option contracts expire worthlessly.
Short Index Options Expire ITM: ITM option contracts are automatically exercised on expiry.
Short Index Options OTM or ATM: OTM and ATM option contracts expire worthless.
Role of Margins in Option Settlement
In options, selling the mark-to-market margins or daily MTM is also considered. Sellers must maintain sufficient margin on a daily basis to cover losses and if there is any shortfall in the margin, the broker issues a margin call, and failure to meet this call may result in penalties.
MTM margins are applied when there is a change between today’s positions compared to the close on the previous day. The daily MTM options settlement is applicable only for the selling the options and not applicable while buying the options.
Any shortfall or failure to maintain the margins leads to a margin penalty or your option trade position will be automatically squared off. The margin facility in trading is offered by the broker as per the margin rules based on the types of security and trading period. However, you can increase your margin limit by pledging shares as a collateral security.
Option Expiry Date in India
The expiry for monthly option contracts in India is typically set on the last Thursday of every month. However, weekly option contracts expire every Thursday of the week.. However, the exchange has proposed to shift the weekly expiry for Nifty options from Thursday to Tuesday but it is subject to approval from the regulatory authorities.
New Option Expiry Date on NSE and BSE
SEBI approved this request of NSE and as per the new rules, existing contracts will retain their current expiry day (Thursday), except for long-dated index options. As per the new rules, new contracts expiring on or before 31 August 2025 will continue to expire on Thursdays.
However, contracts expiring on or after 01 Sep 2025 will shift to Tuesday. And monthly contracts will expire on the last Tuesday of the month from that date.
Similarly, BSE contracts expiring on or before 31 Aug 2025 will continue with the existing Tuesday expiry. But existing contracts will retain their expiry days, except for long-dated index options. Contracts expiring on or after 01 Sep 2025 will move to a Thursday expiry. Monthly contracts, starting in September, will expire on the last Thursday of the month.
Recommended Read: How to Trade in Futures and options?
Wrapping-up
Option settlement in India takes place in the form of cash and physical settlement. All index options are settled in cash, while all stock options take place in physical settlement. All types of contracts have specific expiration dates, and options are either exercised or closed before the end of the expiry date, otherwise, the exchange will automatically square off all the open positions.
In cash settlement, no physical deliveries of shares take place, instead profit or loss is transferred to the trading account of the eligible parties of the contract. While in the physical settlement, call option buyer takes delivery of the shares and option seller delivers the shares as per the agreed price of the underlying security. Currently, all the options expire on the last Thursday of every month, and it is proposed to shift the expiry time on Tuesday from 01 Sep 2025 onwards.
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