W hen you hold stock futures or in-the-money stock options at expiry, you must give or take delivery of the entire contract's stock value. This creates risks if you do not have enough cash to take delivery or stocks to give delivery.
Delivery obligations and margin increases
When you hold stock futures or in-the-money stock options at expiry, you must give or take delivery of the entire contract's stock value. This increases risk if you do not have enough cash to take delivery or stocks to give delivery.
Margins required to hold futures or short option positions increase as expiry approaches, with a minimum of 50% of the contract value or 1.5 times NRML margin (whichever is lower).
In-The-Money (ITM) long option positions
ITM long option positions require delivery margin four days before expiry. Your margins increase from 10% of VaR + ELM + Adhoc margins to 50% of the contract value, with 50% of the contract value required on the last day of expiry.
Out-of-the-money (OTM) options
The risk arises from OTM options that suddenly become ITM on the last day of expiry. No additional margins are blocked for OTM options in the expiry week, and if they suddenly become ITM, you can get assigned to give or take large delivery positions with small amounts of premium and no margin, posing significant risk to you and your brokerage firm.
Broker square-off
Your broker squares off the contract if you lack sufficient funds or stocks to give or take delivery. If you show intent to hold after higher margin is blocked, this indicates your intent to give or take delivery.
For more information about physical delivery risks in stock F&O, visit zerodha.com/z-connect/queries/stock-and-fo-queries/physical-delivery-of-stock-fo-their-risks.