Squaring off in derivatives
This query is : Resolved
09 July 2017
In derivatives market, is it mandatory to square off you position on expiry?Further, a call seller is also required to square off his position in a case where call buyer is not exercising the contract? What happens in that case?
09 July 2017
On expiry day i.e last Thursday of month all open F&O contracts are auto squared off if the traders/investor fails to square off. The Future contracts are settled at closing price of underlying assets. In case of call seller, if the person fails to square off his position, then settlement price depends upon whether the call option is in the money or out of the money.Further of the contracts are auto square off the trader/investor is required to pay higher STT.
10 July 2017
Thanks sirIf on expiry the call buyer is not exercising his right can the call seller simply ignore the contract?
25 July 2025
Great question!
Here’s what happens with **squaring off in derivatives**, especially call options, at expiry:
---
### Is it mandatory to square off your position on expiry?
* **No**, it is **not mandatory** for traders to manually square off (close) their positions before expiry.
* However, **if you don’t**, the **exchange will auto-square off** your open futures and options contracts on expiry day (usually the last Thursday of the month).
* For **futures**, settlement happens at the closing price of the underlying asset.
* For **options**, the position is settled based on whether the option is **in the money (ITM)** or **out of the money (OTM)**.
---
### What if a call buyer does NOT exercise the contract?
* If the **call buyer does NOT exercise**, the option expires **worthless** (if it’s OTM or ATM).
* The **call seller’s obligation ends** when the option expires worthless.
* So, the **call seller doesn’t have to do anything more**; the contract simply lapses.
* No further payment or settlement is required from the seller if the buyer doesn’t exercise.
---
### What if the call buyer exercises or the option is ITM at expiry?
* If the **call buyer exercises** (or the option is ITM at expiry), the **call seller must fulfill the obligation** by either delivering the underlying asset (in case of physical settlement) or paying the cash difference (in case of cash settlement).
* If the seller did not close (square off) the position before expiry, the exchange settles on their behalf.
---
### Summary:
| Scenario | Action Required by Call Seller |
| ------------------------------------------- | ----------------------------------------------------------- |
| Buyer exercises (option ITM) | Seller must fulfill the contract or pay settlement amount |
| Buyer does NOT exercise (option OTM or ATM) | Seller’s obligation ends, no action needed |
| Seller did not square off before expiry | Exchange auto-squares off, settlement happens automatically |
---
**In short:** If the buyer doesn't exercise, the call seller can just let the option expire, no further action is needed.
---
Would you like a simple example or explanation of the settlement process?
Here’s what happens with **squaring off in derivatives**, especially call options, at expiry:
---
### Is it mandatory to square off your position on expiry?
* **No**, it is **not mandatory** for traders to manually square off (close) their positions before expiry.
* However, **if you don’t**, the **exchange will auto-square off** your open futures and options contracts on expiry day (usually the last Thursday of the month).
* For **futures**, settlement happens at the closing price of the underlying asset.
* For **options**, the position is settled based on whether the option is **in the money (ITM)** or **out of the money (OTM)**.
---
### What if a call buyer does NOT exercise the contract?
* If the **call buyer does NOT exercise**, the option expires **worthless** (if it’s OTM or ATM).
* The **call seller’s obligation ends** when the option expires worthless.
* So, the **call seller doesn’t have to do anything more**; the contract simply lapses.
* No further payment or settlement is required from the seller if the buyer doesn’t exercise.
---
### What if the call buyer exercises or the option is ITM at expiry?
* If the **call buyer exercises** (or the option is ITM at expiry), the **call seller must fulfill the obligation** by either delivering the underlying asset (in case of physical settlement) or paying the cash difference (in case of cash settlement).
* If the seller did not close (square off) the position before expiry, the exchange settles on their behalf.
---
### Summary:
| Scenario | Action Required by Call Seller |
| ------------------------------------------- | ----------------------------------------------------------- |
| Buyer exercises (option ITM) | Seller must fulfill the contract or pay settlement amount |
| Buyer does NOT exercise (option OTM or ATM) | Seller’s obligation ends, no action needed |
| Seller did not square off before expiry | Exchange auto-squares off, settlement happens automatically |
---
**In short:** If the buyer doesn't exercise, the call seller can just let the option expire, no further action is needed.
---
Would you like a simple example or explanation of the settlement process?
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