What will happen if I don’t square off my option contract on Trading Day? Explain its consequences on each side of trade.

What are options contracts? Are there any types? How can it be squared on a trading day? What if my option contract does not get squared?
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Short Answer

If you forget to square off your option contract at the end of the day, the contract will automatically be settled if it's an in-the-money option. The contract would be settled on the expiry date and will be sold at the market price.

Detailed Answer

Firstly, let's have a look at few basics.

What is an Option Contract?

An options contract is a contractual relationship to enable a prospective transaction on an underlying asset at a predetermined price, known as the strike price, previous to or on the termination date.

Options are financial assets whose value is determined by the worth of fundamental financial assets such as stocks. An options contract gives the buyer a choice to purchase or sell the selected underlying security at a price stipulated in the contract, either within a specific timeframe or at the contract's end date, depending upon the contract they carry.

An option agreement's primary characteristics are:

  • The underlying assets.
  • The value that security can get traded (market price).
  • The contract's end date.

A standard contract for equities covers 100 shares, but the stock quantity may get modified for stock dividends, special profits, or mergers and acquisitions.

What happens if the option contract is not squared off on the trading day?

In options trading, the expiry is the most important factor that needs to be kept in mind. Not closing your trade can sometimes be detrimental, leading to various penalties and losses. There are usually two sides to trade: the buy-side and the sell-side.

By Position

In this case, the trader will get the specified amount of shares in his account and will need to pay the entire amount upfront. If the individual cannot pay for the shares bought, the exchange will withdraw the shares and sell them.

Sell Position

In a sell position, the trader will need to deliver a particular amount of shares from his account. If the seller cannot provide the underlying security will get auctioned in the free market.

What are the different types of options contracts?

Puts and calls are the two main types of options contracts. Both can be bought to opine on the security's position or hedge vulnerability. They can also get auctioned to create revenue. In a broad sense, call options can be bought as a collateralized bet on a stock's or index's acknowledgment, whereas put options can be acquired to benefit from a drop in prices.

A call option contractor has the right, but not the responsibility, to purchase the number of shares specified in the contract at the market price. On the other hand, buyers have the entitlement, but not the commitment, to sell stocks at the specified price set out in the contract.

Expiration date holds utmost importance when it comes to trading. Often people make huge losses and critical situations when they don’t close off the options at the right time. You have to square off. In simple words it means to close your open position in the market.

Here is an example: If you own 100 shares of XYZ Ltd, then squaring off will entail that you sell those 100 shares in the market. So, practically it means the normal buying and selling mechanism of the market involving two parties-buyer and seller.

Squaring option contracts: The Bottom Line

Options trading is a wide field with many intricacies. Therefore traders must approach it with caution. Squaring off an options contract is always the best choice as it can save you from unnecessary penalties and keep you on the right trading path.

Tagged With: optionsoption contractoption tradingsquare off options
Categories: Option Trading
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Discussion (2)

If the options are not squared off then if the option expires in the money, you will have to take delivery of the shares or sell it depending on call and put nd if it expires out of money then your premium becomes 0.

If I not square off my options position on expiry day how much penality have to pay

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Why is Options Trading considered risky?

Options trading is different from traditional share trading in many ways. Trading in options includes multiple factors like high leverage, delivery obligation on the date of expiry, unlimited loss potential, etc. All these factors make trading in options riskier.

Why is Options Trading more risky on the expiry day?

Options trading involves many factors such as Options Greeks. Options Greeks like Delta, Theta, and Gamma have the most impact on Option prices towards the end of the expiry. The option premiums are impacted highly by Gamma and Delta on the day of expiry. Learn more about Options greeks and how they impact option premiums.

How much money can you make as an option trader? If I trade frequently how much money can I make? Is there any cap?

Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.

Which is the best time frame for options trading? Is there a time slot in which option trading can be more profitable?

Options Trading is a risky business and options traders have to look at various parameters before taking a trade. Choosing a time frame is one of the factors in options traders. Both option Buyer and Sellers use different time frames to trade. Let's see which time frame is most useful for options buying as well as selling.