When you buy an option, you usually just pay the premium, which is a small part of the total value of the shares. However, if you hold a stock option that is In-The-Money (ITM) until it expires, the exchange requires it to be physically settled. This means you must either take delivery of the shares (for a long ITM Call Option) or give delivery of shares (for a long ITM Put Option).
To ensure you can meet this obligation, the exchange (and Groww) requires you to maintain a specific amount of funds in your account, known as the Physical Delivery Margin.
Why is this margin required?
- When you buy an option, you only pay the premium. But for physical settlement, you need funds or shares for the full contract value, which can be much higher than the premium. This margin ensures you have the necessary funds or shares for settlement.
How does the Physical Delivery Margin work for Long ITM Options?- The margin increases as the expiry date approaches, giving traders time to arrange funds or close positions if they don't want to take or give delivery.
Margin Schedule:- Expiry - 4 days: 10% of the Delivery margins
- Expiry - 3 days: 25% of the Delivery margins
- Expiry - 2 days: 45% of the Delivery margins
- Expiry - 1 day: 70% of the Delivery margins
- Expiry Day (T Day): 100% of the Delivery margins
Important Points:- 'Delivery margins' refer to the total value of shares you would receive or deliver based on your ITM option position.
- Automatic Square-off: If you don't maintain the required margins, Groww's system may automatically square off your long ITM option positions to avoid shortfalls and penalties.
- Index Options: This rule applies to stock options. Index options (like NIFTY or BANKNIFTY) are cash-settled and don't need physical delivery margins.
Make sure to monitor your ITM stock option positions as expiry nears and ensure you have enough funds if you plan to hold them for physical settlement.