Previously in this column, we discussed whether you should consider buying an in-the-money (ITM) call for a positive view on an underlying. What about managing an ITM call position till expiry? This week, we look at the difference between managing an ITM index call and an ITM equity call as the option approaches expiry.
Settlement process
ITM equity options result in delivery of the underlying shares at expiry whereas ITM index options are cash settled. This cash settlement makes trading strategies on the Nifty Index simple and efficient. How?
Suppose you were to initiate a long call position on an underlying stock. As the option moves towards expiry, your broker does not know if you will take delivery of the underlying shares at expiry against the long ITM call or whether you will close the position before expiry. As per existing guidelines, your broker will gradually increase the delivery margins on the ITM call starting four days before expiry on the presumption that you will exercise the option. You, therefore, need large trading capital to carry your long equity call position till expiry. You can close your long call position three or four days before expiry to moderate the cash outflow due to delivery margins. The flip side is that you may have to settle for lower gains. That is, you cannot benefit from an increase in price of the long ITM call if the underlying moves up over the last four days.
This argument does not hold for Nifty options. That is, there are no delivery margins on the long ITM index calls as they are cash-settled. So, you can carry your position till expiry and attempt to capture more gains should the underlying move up. Of course, you must be mindful of the possibility that the ITM call may become less liquid as it becomes deep ITM; less liquidity translates into lower time value for the option. But liquidity is a concern only if you want to sell the option before expiry. If you were to hold the option till expiry, an ITM call must be exercised. In the case of equity options, that means you pay the strike price and take delivery of the underlying shares based on the permitted lot size. In the case of index options, your position will be cash settled.
Quick tip You cannot benefit from an increase in price of the long ITM call if the underlying moves up over the last four daysOptional Reading
Cash settlement at expiry for ITM calls involves a payoff that equals the difference between the spot price of the underlying at expiry and the call’s strike price times the permitted lot size. In other words, the intrinsic value is paid by the short to the long. This is more efficient than in the case of equity options where you are required to take delivery of the shares and then sell them in the spot market thereafter. For one, you will incur transaction costs. For another, there could be price slippages by the time you sell the shares.
(The author offers training programmes for individual to manage their personal investments)
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Published on November 1, 2025
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