What are the consequences of not squaring off an option contract before expiry?

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HomeFrequently Asked Questions (FAQs)Trading GuideFutures & Options TradingWhat are the consequences of not squaring off an option contract before expiry?

If you don’t close (square off) your option position before expiry, the exchange will automatically settle it for you. The outcome depends on whether you are an option buyer or an option seller:

For Option Buyers:

  • ITM (In-The-Money): Option is exercised automatically, and you receive the profit after charges.
  • OTM (Out-Of-The-Money): Option expires worthless, and you lose the premium paid.

For Option Sellers (Writers):

  • ITM: You must pay the settlement difference to buyer, which can be substantial.
  • OTM: Option expires worthless, and you keep the premium received.

Example:

  • You buy a Reliance Put Option with a strike price of ₹2500.
  • On expiry, if the stock closes at ₹2450 (below strike price), the option is ITM. You automatically make ₹50 per share minus charges.
  • If the stock closes at ₹2550, the option is OTM, expires worthless, and you lose the premium.

Note: Buyers risk only the premium, while sellers face potentially large losses if the option expires ITM.