What does the devolvement of ITM commodity options mean, and what impact does it have on the positions?
What is devolvement at Tradejini?
Devolvement at Tradejini refers to the process of converting an in-the-money (ITM) commodity options contract into an underlying futures contract of the same asset. When a commodity option is ITM, it is devolved into the underlying futures contract. The strike price of the devolved options contract is determined by the buy average for taking delivery or the sell average for giving delivery of the futures contract.
What happens if I hold an ITM option at Tradejini, but there aren’t sufficient margins?
If your ITM option position doesn’t have enough margins in your Tradejini account to hold until expiry, the position will be squared off after 9 PM on the expiry day. However, if there are sufficient margins in your trading account and you hold an ITM option contract, it will be devolved into the underlying futures contract from the very next day after expiry.
What occurs on the options contract expiry date at Tradejini?
On the options contract expiry date, all open ITM options contracts will be devolved into futures. The exchange blocks a margin equivalent to 25% of the futures margin required to hold the ITM option contract 2 days before expiry, 50% 1 day before expiry, and 100% for devolvement. Failure to have the required margin in the trading account may result in a square-off of open positions at Tradejini’s discretion. If an ITM options trade cannot be matched with a counterparty, it will be cash-settled.
Example Scenario at Tradejini
Let’s say Gold is at 31500 levels. The GOLD 19JAN 31000 CE is an ITM option contract. On the expiry day, it will devolve into GOLD 19FEB FUT, with a buy average of 31000. Short position settlement happens based on the counter buyer consent. If you have open hedge positions on expiry day, it may result in a net-off. In the case of having Long futures and a short call option, the short call option will be devolved into a short future position after 11:30 pm on the expiry day. Positions will be netted off, and these won’t be carried forward.