Heavy Penalty on Stock Option Trading

 

 

In this article, I will walk you through what happens if you do not exit your trading position in the stocks until the expiry, and we will also talk about the physical settlement of the stock.

 

Table of Contents

 

Heavy Penalty on Stock Option Trading

If you won't square off your position in expiry until the market closes, if It's an ITM option and you are trading on the stocks, you have to pay for the physical delivery of all the stock. By means you have to take delivery of all stocks, which you had ordered while buying option, also, it will cost you lots of money.

 

Important Notice:-

The regulation is based on SEBI(Security and Exchange Board of India), which regulates security in the stock market, and in the US market, we have the SEC(Securities and Exchange Commission)

And I have no idea how this thing works in your country because every country has different rules and regulations for physical settlements. It is also called Physical Settlement

 

What is Physical Settlement?

It is the process of transferring actual shares from the seller to the buyer account within book entry. Modern days, The stock shares transfer electronically within a book entry.

 

Cost to Take Delivery of the Stocks,

You can't predict the exact amount, but it will be expensive. So, it is better to avoid trading in stocks if you're a beginner, and if you are from the USA, read the guidelines about stock exchanges on their official website.

 

Full Money = Lot Size (No. of Shares)*Strike Price

 

Some brokers will auto-square off your position if your account does not have enough margin in the trading account. And some broker does not.

Important Rules Must Know Before Trading in Stocks Options,

 

• Stock trading is not for beginners because of the physical settlement.
 
• Liquidity is always an issue in stock options trading, and it might be different in your country.
 
• And if you take any position in the stock for intraday trading, then make sure you have exited your trade before the expiry because it has a liquidity issue.
 
• Do not plan for heavy quantities because it has liquidity issues.

 

Liquidity in the Stocks,

I have also talked about the liquidity in the stock option, so let's dive into it. For order execution in the stock market, there must be a buyer and a seller at a time, which you could say liquidity in the stocks, which is called liquidity.

 

 

From my experience in my country, liquidity is always an issue in stock options trading. I always prefer to trade in Index Options because we do not have to worry about liquidity.