What is devolvement for commodity option and how does it work?
Commodity option contracts that are In the Money(ITM) devolve into Futures contracts after the expiry of the option contract. All Out the Money(OTM) options expire worthlessly. If the option you hold is ITM and if you don't have sufficient margins to hold till expiry, then the position will be squared off after 9 PM on the expiry day. If you have sufficient margins in your trading account and you hold an ITM option contract, then it will be devolved into Futures Contract of the underlying futures contract from the very next day of expiry.
The exchange blocks a margin equivalent to 25% of the futures margin required to hold the ITM option devolved future contract 2 days before expiry and 50% of the futures margin, 1 day before expiry. 100% of the futures margin for devolvement. On expiry day 100 % margin is required to maintain the position or the position will be squared off anytime after 9 pm on the expiry day. See Margin Calculator.
Short position settlement happens based on the counter buyer consent. If you have open hedge positions on expiry day, it may result in a net-off. In such an event, these positions won’t be carried forward. If you have Long futures and short call option, the short call option will be devolved into a short future position after 11:30 pm on the expiry day. In such a case, the positions will be netted off and these won’t be carried forward.