What is devolvement of Commodity Options?
Before we begin consider an example where you have bought an option contract of Gold 26 Mar 2024 66000 CE and on 26th March 2024 the Gold is at 66300, hence your contract is at ITM
Now what if you don’t sell your gold option contract which is at ITM on the expiry date?
Simple the above mentioned option call contract gets converted into a future contract of the upcoming Future expiry date of the gold which is Gold Fut 05 APR 2024. This conversion of option contract to future contract is called DEVOLVEMENT
What if your same option contract was at OTM or ATM on the expiry date
In case of OTM the cash settlement will happen and if the contract is ATM then the devolvement will happen if instructed
How much margin should be maintained in the fund balance?
Maintain full margins specified by the exchange and member all the times. In case the specified margin is not maintained, Kotak Securities risk team may liquidate full or partial positions to clear the obligations if any.
Can Kotak Securities liquidate Option contract on expiry date?
Yes, at Kotak Securities the risk team may square off (liquidate) Options Long open positions post 9:00 pm on account of internal risk management policy to avoid losses due to devolvement of options into futures. Clients are advised to make a note of the same.
If you had a long/short, call/put the conversion will happen as below (if ITM):
- Long Call Option Position – Converts into Long Future Positon
- Short Put Option Position – Converts into Short Future Position
- Long Put Option Position – Converts into Short Future Position
- Short Put Option Position – Converts into Long Future Positon
If you want to avoid the devolvement of your option contract, we insist you to square off your expiring option contract before 9 pm on the expiry day. Kotak securities risk management team may liquidate the options long positions after 9 pm to avoid the risk of devolvement leading to losses / margin shortfall penalty.