Why Purchasing Stock Options Near Expiry is Restricted?
Buying new or long positions in out-of-the-money (OTM) stock options during the final two days before expiry (specifically on Wednesday and Thursday) is prohibited. This restriction is in place because such contracts may be subject to physical settlement. However, clients are still allowed to close out their existing short positions for the quantities they currently hold. For more details on this, you can refer to
5Paisa's policy regarding the physical settlement of equity derivatives on expiry.
One key reason for this rule is that margin requirements can rise quickly if a client’s options contracts are due for physical delivery. Additionally, stock options often suffer from low liquidity, making it challenging to exit a contract. This increased difficulty and risk can pose significant concerns for brokerage firms.
Related Articles
What are the risks associated with the physical delivery of stock Futures & Options (F&O)?
In the Indian capital markets, the physical delivery of stock derivatives, particularly stock futures and in-the-money stock options at expiry, introduces significant systemic risks. Here's a simplified breakdown of the implications: 1. Stock Futures ...
What is Physical Settlement in Equity Derivatives (Futures & Options) and How to Place Order in 5paisa?
The physical settlement means if you hold a position in any Stock F&O contract, at expiry, you will be required to give/take delivery of stocks. The physical settlement is restricted only to stock derivatives. Physical settlement of index options is ...
Why is higher than usual margin blocked for my F&O trades close to expiry?
Higher than usual margin is blocked for Futures and Options (F&O) trades close to expiry due to the nature of physical delivery associated with these contracts. As F&O contracts approach their expiry date, the margins required for these contracts ...
What happens if the F&O position is not squared off until the end of the session on expiry day?
If you fail to square off your options positions on the expiry day, the settlement will be based on the exchange's determined price. The difference between the settlement price and your entry prices will be reflected in your trading account ledger. ...
What is the impact of Corporate actions on futures and options?
Corporate actions can have various impacts on futures and options contracts. Here are some key points: 1. Adjustments in Contract Terms: Corporate actions such as stock splits, mergers, acquisitions, or spin-offs can lead to adjustments in the terms ...