Chapter 3 of 5
Option premium, expiry and physical-delivery funding
Distinguish premium payable from a writer’s risk margin and from the cash or securities needed when contracts settle.
In this chapter
Expiry can change the requirements #
Offset benefits, additional margins and contract eligibility can change near expiry. A familiar hedge can become more expensive to carry even without a large underlying move. Current circulars and the exact expiry series must be checked.
Physically settled stock options introduce cash or securities obligations when exercise and assignment occur. A long call can require funding to receive shares; a long put can require deliverable shares. Small premium paid does not mean those operational requirements are small.
Commodity transitions require another check #
A commodity option can have futures-devolvement mechanics under its own terms. The resulting future can require margin and enter a tender or delivery process. An equity-index payoff example does not settle those obligations.
Create a dated checklist: premium funding, risk margin, delivery capacity, official calendar, broker cutoff and contingency for a failed exit. The correct checklist comes from the actual contract, not the calculator’s generic default inputs.
Decision lab: Payoff bounds and settlement funding are different tests #
A matched option spread can have a bounded terminal diagram while still needing premium cash, margin or delivery resources. The answer depends on actual legs, exercise and settlement. A missing leg can also change the diagram entirely.
Build an inception cash ledger, an adverse pre-expiry ledger and an expiry obligation ledger. Include partial fills and a failed exit. Separate a capital-budget rejection from a payoff-budget rejection; both can independently make the position ineligible.
Hypothetical worked example
Separate three obligations in a worked case
An illustrative account holds a long stock call on 500 shares with strike ₹200 and premium ₹6. Premium paid is ₹3,000. If exercised under matching physical-settlement terms, strike consideration is ₹1,00,000.
Those are different amounts serving different purposes. Any relevant delivery margin, taxes, charges or netting rules must be assessed separately. A hypothetical short option may instead receive premium while requiring a substantial risk margin.
Do not add the ₹1,00,000 to the premium and call it the isolated option’s automatic price loss. It is a funding and settlement question, with subsequent asset exposure if shares are received.
Common mistakes
- Treating option premium as the full underlying settlement value.
- Assuming all derivative credits are immediately interchangeable with cash.
Why must a long stock option be reviewed before physical settlement?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Sources and further reading
- NSE Clearing: equity derivatives margins ↗
- SEBI: expiry-day calendar-spread review, 5 February 2026 ↗
- NSE individual-security derivatives specifications ↗
- MCX Clearing: delivery FAQs ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.