Option Settlement in India: Explained in Simple English

The Expiry Day Confusion Most Traders Face

It's Thursday, 3:25 PM. Your Bank Nifty call option is ₹200 in profit. You're excited. Then suddenly, you panic:

"Wait... what happens now? Will I get shares? Will someone take my money? Do I need to do something?"

If this sounds familiar, you're not alone. Option settlement confuses most Indian traders — even those who've been trading for years.

The good news? It's actually simpler than you think. In the next 15 minutes, you'll understand exactly what happens to your options when they expire.

"Understanding settlement is like understanding the rules of a game. You can't win if you don't know how points are scored."

— Trading Wisdom

Let's clear the confusion once and for all.

What is Option Settlement? The Simple Version

Think of option settlement like closing a deal.

When you buy an option, you're making a deal with someone. On expiry day, that deal must be closed. Settlement is simply how that deal gets closed.

The Restaurant Booking Analogy

Imagine you book a table at a fancy restaurant for Saturday night. You pay ₹500 as booking fee.

• If you show up: You get the table. Your booking fee was worth it.
• If you don't show up: You lose your ₹500 booking fee. The restaurant keeps it.

Options work the same way. The premium you pay is like the booking fee. On expiry, the deal is either executed or it expires worthless.

But here's where it gets interesting: In India, different options are settled in different ways.

Two Types of Settlement in India

In India, SEBI (the market regulator) allows two types of settlement:

Let's understand each type in detail.

Cash Settlement: The Simple One (Index Options)

Cash settlement is like betting on a cricket match. You don't get the trophy — you just get money if you win.

How It Works

When your index option (Nifty, Bank Nifty, Sensex) expires In-The-Money (ITM):

Real Example — Bank Nifty Call Option

Let's say you bought:

• Bank Nifty 48000 CE (Call Option)
• Premium paid: ₹150
• Lot size: 15

On expiry day: Bank Nifty closes at 48500.

Your option is In-The-Money by 500 points (48500 - 48000 = 500).

Notice: No shares were bought or sold. Only money changed hands. This is cash settlement.

What Happens to OTM Options?

If Bank Nifty closed at 47800 instead (below your 48000 strike):

• Your option is Out-of-The-Money (OTM)
• It expires worthless
• You lose your premium (₹2,250)
• No action needed — it just disappears from your account

Physical Delivery: The Tricky One (Stock Options)

This is where most traders get surprised. Since 2019, SEBI made physical delivery mandatory for all stock options.

What does this mean? If your stock option expires ITM, actual shares will be delivered.

The Marriage Analogy

Think of stock options like an arranged marriage:

• Call option: You promised to "marry" (buy) the shares at a fixed price
• Put option: Someone promised to "marry" (buy) the shares from you at a fixed price

On expiry, if the option is ITM, this "marriage" must happen — shares must change hands!

Real Example — Reliance Call Option

You bought:

• Reliance 2800 CE (Call Option)
• Lot size: 250 shares
• Premium paid: ₹30 per share (₹7,500 total)

On expiry: Reliance closes at ₹2,900.

Your option is ITM. Now here's what happens:

Your profit is ₹25,000 (minus the ₹7,500 premium = ₹17,500 net profit). But the important thing is: You now own 250 Reliance shares!

What About Put Options?

If you had bought a Reliance 2900 PE (Put Option) and Reliance closed at ₹2,800:

• Your put is ITM
• You must deliver 250 shares of Reliance
• You will receive ₹2,900 × 250 = ₹7,25,000

The catch: You must own those 250 shares to deliver. If you don't have them, your broker will buy them from the market — often at a loss to you.

Physical Delivery Rules You Must Know

Physical delivery has some important rules. Breaking them can be expensive.

Rule 1: Margin Increases During Expiry Week

From 4 days before expiry, margins on stock options increase. This is because the exchange wants to make sure you can afford the delivery.

This can catch you off guard. A position that needed ₹50,000 margin might suddenly need ₹3-4 lakh during expiry week!

Rule 2: Close Before Expiry to Avoid Delivery

Don't want physical delivery? Simple solution: Close your position before expiry.

• Sell your calls before 3:30 PM on expiry day
• Buy back your puts before 3:30 PM on expiry day
• You'll get your profit/loss in cash, no shares involved

Rule 3: What If You Can't Afford Delivery?

If you hold an ITM stock option till expiry but don't have money/shares for delivery:

• Your broker will try to square off your position at market price
• You might face penalties and auction charges
• The closing price might be worse than expected
• Some brokers charge additional fees for forced closure

Understanding ITM, ATM, and OTM at Expiry

Whether your option settles or expires worthless depends on one thing: Is it In-The-Money?

For Call Options (CE)

For Put Options (PE)

"Only ITM options have settlement value. OTM options expire worthless. There's no in-between on expiry day."

— The Options Reality

Expiry Days in India: The Complete Schedule

India has one of the busiest expiry schedules in the world. Here's when different options expire:

Settlement Timeline: When Do You Get Your Money?

After expiry, here's what happens:

Cash Settlement Timeline

• Expiry Day (T): Market closes at 3:30 PM, settlement price calculated
• T+1 Day: Money credited or debited to your trading account

Example: If Nifty expires on Thursday, you'll see the settlement amount in your account by Friday evening.

Physical Delivery Timeline

• Expiry Day (T): Position marked for delivery
• T+1 Day: Shares debited/credited to your Demat account
• T+1 Day: Money debited/credited to your trading account

What About Option Sellers?

Everything we discussed applies to option buyers. But what if you sold options?

If You Sold a Call Option (CE)

You have the obligation to deliver shares if the buyer wants them.

• Index options: You pay the settlement difference if ITM
• Stock options: You must deliver the shares if ITM

Example: You sold Tata Motors 800 CE. Stock closes at 850. You must deliver shares at ₹800 (or buy them at ₹850 and deliver at ₹800, losing ₹50 per share).

If You Sold a Put Option (PE)

You have the obligation to buy shares if the buyer wants to sell them.

• Index options: You pay the settlement difference if ITM
• Stock options: You must accept delivery of shares if ITM

Example: You sold Infosys 1500 PE. Stock closes at 1400. You must buy 400 shares at ₹1500 each (₹6 lakh), even though they're worth only ₹5.6 lakh in the market.

5 Common Settlement Mistakes to Avoid

The STT Trap on Expiry Day

Here's something that surprises most traders: STT (Securities Transaction Tax) is higher on ITM options at expiry.

Example of STT Impact

You hold Nifty 22000 CE. Nifty expires at 22100.

Option 1: Sell before expiry at ₹105

• Premium: ₹105 × 75 = ₹7,875
• STT: 0.0625% of ₹7,875 = ₹4.92

Option 2: Let it expire ITM

• Contract value: ₹22,000 × 75 = ₹16,50,000
• STT: 0.125% of ₹16,50,000 = ₹2,062.50

That's a ₹2,057 difference in taxes! For a ₹7,500 profit, losing ₹2,000+ to STT is painful.

Practical Tips for Expiry Day Trading

"Expiry day is not for gambling. It's for executing your plan. If you don't have a plan, you don't have a trade."

— Professional Trader Wisdom

Quick Summary: What You Need to Remember

Let's wrap up everything in simple points:

Index Options (Nifty, Bank Nifty, Sensex)

• Always cash settled — no shares involved
• ITM options: You get the difference in cash
• OTM options: Expire worthless, you lose premium
• Settlement happens T+1

Stock Options (Reliance, TCS, etc.)

• Physical delivery mandatory for ITM options
• Margins increase during expiry week
• Close before expiry if you don't want delivery
• Need full cash/shares for delivery obligation

Golden Rules

• Know your settlement type BEFORE trading
• Close stock options 1-2 days before expiry if unsure
• Watch out for STT on ITM expiry
• Keep extra margin during expiry week
• Don't wait till last minute to close positions

Now you know more about option settlement than 90% of Indian traders. Use this knowledge wisely.