Why were funds deducted from my Zerodha account when I exited a profitable short options position?

When you exit a profitable short options position, the exit cost is deducted from the premium you originally received. You can see this deduction on the Funds tab in the Options premium column on the day you short the options.

The premium is the current market price of an option contract. When you sell (write) an option, you receive this premium. When you buy an option, you pay this premium.

After you sell or short an option contract, you have two choices:

1. Exit the position by buying back the contract

When you buy back the contract, your profit or loss equals the difference between the premium you received and the price you paid to buy it back.

Example:

1. You sell RELIANCE SEP 2800 CE on Monday when the premium is ₹42 with a lot size of 250.
2. You receive ₹42 × 250 = ₹10,500 in your trading account.
3. You exit the short position on Wednesday when the premium drops to ₹25.
4. You make a profit of ₹4,250 [(₹42 - ₹25) × 250] by buying back the contract.
5. Since you already received ₹10,500 when you sold the options, ₹6,250 (₹10,500 - ₹4,250) is deducted from your funds when you exit the position.

Even though you made a profit, ₹6,250 is deducted from the premium you received because you bought back the option at ₹25. Your net profit is ₹4,250. The margin blocked for shorting the options is released once you buy back the short position.

2. Hold the position till expiry

When you hold the position until expiry and it expires out-of-the-money (OTM), the premium becomes zero, and you keep the entire premium as profit.

Using the example above, you keep the entire ₹10,500 as profit only if the premium becomes zero, which happens when the position expires OTM.

If the position expires in-the-money (ITM), stock options are physically settled, and index options are cash-settled.

For stock options, you need to either:

• Give delivery (for call options): You must deliver the stock from your demat account. If you don't have the stocks, you will face a short delivery and will need to pay an auction penalty.
• Take delivery (for put options): You must take delivery of the stock. If you don't have sufficient funds in your trading account, your account will show a debit balance.

To learn more about option premium calculation for multiple trades, see How is Option Premium calculated when there are multiple trades?