Expiry, settlement and your P&L

Most trades never reach expiry

Here's something beginners don't expect: you rarely "exercise" an option. Most traders simply square off — sell what they bought, or buy back what they sold — at whatever the market price is.

P&L = (exit price − entry price) × quantity, for a buyer P&L = (entry price − exit price) × quantity, for a seller

Example: you bought 2 lots of NIFTY 22400 CE at ₹175 and sold them at ₹212.

If you hold till expiry: index options

All index options in India (NIFTY, BANKNIFTY, SENSEX…) are cash settled. Nobody delivers "a NIFTY". Instead:

1. 1

   The exchange fixes a final settlement price

   For an index, it is based on the index close on expiry day.

2. 2

   ITM options are exercised automatically

   Their intrinsic value at that settlement price is paid from sellers to buyers.

3. 3

   OTM options expire worthless

   Buyers lose the premium; sellers keep it. Nothing else happens.

4. 4

   Money shows up the next trading day

   Your position disappears from the positions page and the cash moves.

Example: you hold the 22400 CE (bought at ₹175) and NIFTY settles at 22,630. The option is worth 230. You receive 230 × 65 = ₹14,950. Your net profit is (230 − 175) × 65 = ₹3,575.

If you hold till expiry: stock options

Stock options are different. If they finish ITM, they are physically settled — shares actually change hands.

For a stock with lot size 500 and strike ₹1,500, a long ITM call means buying ₹7.5 lakh of shares. Brokers usually ask for extra margin in expiry week and may square off positions that aren't funded.

Daily accounting: mark-to-market

While a position is open, your broker shows its value at the current market price every day. That's mark to market (M2M) — the profit or loss you'd book if you exited now. It's unrealised until you actually close.

• Option buyers paid the full premium upfront, so there's nothing more to pay — the M2M is just information.
• Option sellers have margin blocked, and that margin requirement can go up if the market moves against them. If your account can't cover it, the broker may close your position.

Don't forget charges

The P&L figures in these lessons are gross. Real trades also pay brokerage, STT (securities transaction tax), exchange fees, GST and stamp duty. On a small option trade these can be a noticeable slice of the profit — always look at the contract note.