What is devolvement for commodity option and how does it work?
Devolvement refers to the conversion of an option contract into a futures contract of the same underlying. When commodity options are In the Money (ITM), they are devolved into the underlying futures contract. The strike price of the devolved options contract is the buy average for take delivery or the sell average for give delivery of the futures contract. If the option is ITM and there aren't sufficient margins in the Zerodha account to hold till expiry, then the position will be squared off after 9 PM on the expiry day. If there are sufficient margins in the trading account and an ITM option contract is held, it will be devolved into the underlying futures contract from the very next day of expiry.
On the options contract expiry date, all open ITM options contracts will be devolved into futures. The exchange blocks a margin equivalent to 25% of the futures margin required to hold the ITM option contract 2 days before expiry and 50% of the futures margin 1 day before expiry, and 100% of the futures margin for devolvement. Failing to produce the margin in the trading account can result in a square-off of open positions at Zerodha’s discretion. If the ITM options trade cannot be matched with a counterparty, it will be cash-settled.
Example Scenario
- 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 a buy average of 31000.
Short position settlement happens based on the counter buyer consent. If a client has 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 Long futures and short call option positions are held, 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.
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