What happens if I do not sell an index option on expiry?

 

So, you’ve held onto your index option until expiry and are wondering, "What now?" Let’s walk through what happens in a clear and straightforward way, so you know what to expect.

1. It Depends on the Option’s Status: ITM, ATM, or OTM

When your option reaches expiry, the outcome depends on where the underlying index closes in relation to your strike price.

In-the-Money (ITM) Options

• If your call option strike price is lower than the index's closing value, or your put option strike price is higher, your option is considered ITM.
• Most brokers automatically exercise ITM options for you, so you don’t have to worry about missing out on potential gains.
• You’ll receive a cash settlement equal to the difference between the strike price and the final settlement value (multiplied by the lot size).

Example:

You hold a Nifty 50 call option with a strike price of ₹18,000. If Nifty closes at ₹18,500, the intrinsic value of your option is ₹500.

Your profit:

₹500 × 50 (lot size) = ₹25,000.

At-the-Money (ATM) Options

• If the index closes exactly at your strike price, your option is ATM.
• ATM options have no intrinsic value, so they’ll expire worthless. You won’t owe anything, but you’ll lose the premium you paid to buy the option.

Example:

You bought a Bank Nifty call option with a strike price of ₹43,000. If Bank Nifty closes at ₹43,000, the option expires without any value. You lose the premium you paid.

Out-of-the-Money (OTM) Options

• If your call option strike price is above the index's closing value, or your put option strike price is below it, the option is OTM.
• Just like ATM options, these expire worthless, and you lose the premium you paid.

Example:

You hold a Bank Nifty 44,000 call option, and Bank Nifty closes at ₹43,500. Since it didn’t cross ₹44,000, the option is worthless.

2. How Index Options Are Settled

Index options are cash-settled, which means no physical delivery of any shares or assets happens. Instead, the difference between the strike price and the final settlement value is paid in cash.

Final Settlement Value

In India, this is calculated based on the weighted average price of the index during the last 30 minutes of trading on the expiry day.

3. What If You Forget to Act?

If you forget to sell your option or decide to let it ride:

• ITM Options: Your broker will likely auto-exercise it, and you’ll get the cash settlement. However, check with your broker, as some have thresholds (e.g., the option must be ITM by a certain amount).
• ATM/OTM Options: These expire worthless, and you lose the premium.

4. Tax Implications

The profit or loss from your option will count as capital gains or business income depending on how you classify your trading. If you’re actively trading options, consult a tax advisor to understand your obligations.

5. Key Takeaways for You

• Always keep track of the expiry date for your options. The closer it gets, the more time value (Theta) erodes your premium.
• Decide your strategy in advance: Do you want to sell before expiry or let it ride?
• Monitor liquidity: Near expiry, OTM options often lose liquidity, making them harder to sell.
• If you’re unsure, check your broker’s policies on auto-exercise and settlement thresholds.

While holding an option until expiry isn’t always ideal, it doesn’t have to be a disaster if you understand the process. Keep a close eye on your trades, have a plan, and let your strategy guide you. Happy trading!