Why were funds deducted from TradeJini account for exiting a profitable short options position?

1. What happens when I exit a profitable short options position?

When you exit a profitable short options position, the amount required is deducted from the premium you received. You can easily track this on the fund’s tab, specifically in the Options Premium column on the day the options were shorted.

Example:

Let’s say you sold RELIANCE SEP 2800 CE when the premium was ₹42, with a lot size of 250. If you received ₹10,500 as premium and later exited the position when the premium dropped to ₹25, making a profit of ₹4250 [(₹42 – ₹25) * 250], ₹6250 (₹10,500 – ₹4,250) would be deducted from your funds upon exit. Even though you made a profit of ₹4250, the initial premium received plays a role in the deduction. The margin blocked for shorting the options will be released once the short position is bought back.

2. What happens if I hold the position till expiry?

If you decide to hold the position until expiry and the premium becomes 0, you get to keep the entire premium received as a profit. This only happens if the position expires Out of The Money (OTM). In our example scenario, Mr. X would keep ₹10,500 entirely as profits only if the premium becomes 0, which occurs when the position expires OTM.

3. What if the position expires In The Money (ITM)?

Stock Options: If the position expires ITM, you have two options:

Give Delivery: For short call options, you need to deliver the stock. However, if you don’t have the stocks in the demat account, there will be a short delivery, incurring a short delivery penalty.

Take Delivery: For short put options, you need to take delivery of the stock. If you don’t have sufficient funds, it results in a debit balance in your trading account.

Index Options: If the position expires ITM, index options will be cash-settled. The remaining amount will either be debited or credited to your trading account after the daily settlement process.