What happens if the option contract is not squared off on the expiry date?

If a stock option contract is not squared off by the expiry date, the outcome depends on whether it is In-The-Money (ITM), Out-Of-The-Money (OTM), or At-The-Money (ATM):

• Stock options contracts that are ITM are physically settled. To learn more about the physical settlement, see What is Zerodha's policy on the physical settlement of equity derivatives on expiry?
• Stock options contracts that are OTM or ATM expire worthless.

Index options are cash-settled because the underlying asset is an index, not a physical stock or commodity. If an index option contract is not squared off by the expiry date, the outcome depends on whether it was bought or sold and if it is In-The-Money (ITM), Out-Of-The-Money (OTM), or At-The-Money (ATM):

If the index options are bought:

• • Contracts expiring ITM:
    • ITM option contracts are automatically exercised on expiry.
    • The profit or loss will be settled in cash based on the difference between the strike price and the closing price of the index on the expiry day.
    • Securities Transaction Tax (STT) of 0.125% of the intrinsic value is applicable. To learn more about STT, see What is Securities Transaction Tax (STT) and how is it calculated?
    • Brokerage will be charged on both sides, i.e. when the options are bought and when they are settled on the expiry day. To learn more, see What are the brokerage charges for resident individual accounts at Zerodha?
  • Contracts expiring OTM or ATM:
    • OTM and ATM option contracts expire worthlessly.
    • The entire amount paid as a premium will be lost.
    • Brokerage will only be charged on one side, which is when the options are purchased, and not when they expire worthless on the expiry day. To learn more, see What are the brokerage charges for resident individual accounts at Zerodha?

If the index options are shorted or sold:

• • • • Contracts expiring ITM:
        • ITM option contracts are automatically exercised on expiry.
        • The profit or loss will be settled in cash based on the difference between the strike price and the closing price of the index on the expiry day and the premium received.
        • STT is only on the sell side. Therefore, on expiry it will not be charged again.
        • Brokerage will be charged on both sides, i.e. when the options are bought and when they are settled on the expiry day. To learn more, see What are the brokerage charges for resident individual accounts at Zerodha?
      • Contracts expiring OTM or ATM:
        • OTM and ATM option contracts expire worthlessly.
        • Seller retains the entire premium amount.
        • Brokerage will only be charged on one side, which is when the options were sold, and not when they expire worthless on the expiry day. To learn more, see What are the brokerage charges for resident individual accounts at Zerodha?