What does devolvement of ITM commodity options mean and what impact does it have on my positions?
Devolvement means that the option contract will get converted into a futures contract of the same underlying. All In the Money Commodity options will devolve into the underlying's futures contract. The futures contract will be at the strike.
All open ITM options contract will be devolved into futures on the expiry date of the options contract. The exchange blocks a margin equivalent to 25% of the margin required to hold the devolved future contract 2 days before expiry and 50% of the margin, 1 day before expiry.
Failure to produce the margin in the trading account can lead to a square-off of open positions at the discretion of the RMS team.
Ex - Gold is at 31500 levels. GOLD 19JAN 31000 CE is an ITM option contract. On expiry day, GOLD 19JAN 31000 CE will devolve into GOLD 19FEB FUT, with the buy average of 31000.
All long option holders which are ‘CTM’ (close to money) [2 strikes above and below At the money], will have to give us an explicit instruction. You can give use an explicit instruction by raising a ticket or calling our support desk. An explicit instruction will devolve the option into a futures contract. If you do not give an explicit instruction to devolve your CTM option, then the option will be deemed worthless similar to OTM (out of the money) option contracts.
Note: In case the exchange is unable to match your contract with a counter-party, your ITM options trade will be cash-settled instead of getting devolved into a futures contract.