What Will Happen if an Option Contract is Not Squared Off on Expiry?

What happens to Options on expiry day?
Option settlement depends on whether the contract expires in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM). Index options in India are cash settled. In-the-money index options are automatically exercised, and profits or losses are settled in cash based on the closing value of the underlying index. Out-of-the-money and at-the-money index options expire worthless.

Stock options, by contrast, are physically settled. In-the-money stock options result in an obligation to take or deliver shares at the strike price. This has direct implications for margin requirements and capital availability. Traders who do not wish to participate in physical settlement typically square-off their positions before expiry.

Futures settlement on expiry
Index futures are cash settled. If a position remains open at expiry, it is automatically closed at the official closing price, and the resulting profit or loss is credited or debited to the trader’s account. Stock futures involve physical settlement, requiring delivery or receipt of shares if positions are not closed in time. Due to the logistical and financial implications, most traders avoid allowing stock futures to reach physical settlement.