Investing physical settlement delivery margin expiry stock options Zerodha

Stock-option restrictions near expiry

From WebNotes, a public knowledge base. Last updated 21 June 2026. Reading time ~12 min.

Key facts

Delivery-margin start	Four days before expiry, that is from the previous week's Wednesday up to expiry day, on ITM stock options and stock futures
Margin basis	A percentage of the underlying stock's applicable margin (VaR + ELM + Adhoc), scaling up across the four days
Indicative ramp	Roughly 10%, 25%, 45% and 70% of applicable margin on successive days, scaling toward about 50% of contract value by expiry day (NSE schedule)
Margin type	Delivery margin is a non-upfront margin, collectible by T+1, but a shortfall draws a penalty
Fresh-position block	Zerodha blocks fresh deep-ITM and illiquid stock-option positions near expiry and disallows market orders in illiquid stock options
Exit deadline	You can square off an ITM stock option until 3:30 PM on expiry day to avoid physical delivery

Stock options are restricted near expiry because all single-stock derivatives on the National Stock Exchange are compulsorily physically settled on expiry, and an in-the-money stock option that is held to expiry converts into an obligation to give or take delivery of the underlying shares. To make traders fund that obligation in advance, the exchange applies a physical-delivery margin ramp on in-the-money stock options starting four days before expiry, and Zerodha layers its own controls on top: it blocks fresh deep-in-the-money and illiquid stock-option positions near expiry and runs square-off-only behaviour where appropriate. This article explains the margin ramp day by day, why the blocks exist, and how to avoid both.

The same physical-settlement logic that drives these restrictions is set out in physical settlement of stock F&O and the avoidance routes in how to avoid physical settlement of options . This article focuses on the expiry-week mechanics: the rising margin, the order blocks, and the exit window.

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this article does not carry it and earns no referral commission.

The physical-delivery margin ramp

Because an in-the-money (ITM) stock option held to expiry results in delivery of the underlying shares, the exchange does not wait until expiry to collect the funds needed for that delivery. It imposes a physical-delivery margin on ITM stock options starting four days before expiration, that is from the previous week’s Wednesday up to and including expiry day. The margin is calculated as a percentage of the applicable cash-market margin on the underlying stock, where the applicable margin is the sum of the value-at-risk (VaR) margin, the extreme-loss margin (ELM), and any adhoc margin.

The percentage scales up each day as expiry approaches. The indicative ramp follows a rising schedule of roughly 10%, 25%, 45% and 70% of the applicable margin on successive days, scaling toward about 50% of the contract value by expiry day. The exact percentages are set by the exchange and can change, so treat the figures as the shape of the ramp rather than fixed constants. The point is that the margin on an ITM stock option you hold into expiry week is small at the start of the week and large by expiry day.

Day relative to expiry	Indicative delivery margin (of applicable VaR + ELM + Adhoc)
Four days before (previous Wednesday)	~10%
Three days before	~25%
Two days before	~45%
One day before	~70%
Expiry day	Scaling toward ~50% of contract value

The ramp applies to ITM long option positions and to stock futures held into the expiry window. An out-of-the-money option carries no delivery margin because, if it expires OTM, there is no intrinsic value and no delivery obligation.

Delivery margin is a non-upfront margin

The delivery margin sits in the non-upfront category of exchange margins, alongside Additional Margin, Special Margin, Tender Margin, and Concentration Margin. Non-upfront margins do not have to be in the account before the trade; a shortfall can be collected up to the next day (T+1). That gives a small timing cushion, but it is not a free pass. Holding an ITM stock-option position without the exchange-stipulated delivery margin draws a margin penalty, and Zerodha may square off the position if the margin obligation is not met within the stipulated timeframe.

A feature that surprises many hedged traders is that delivery margins are charged on each F&O leg separately, even when the net delivery obligation is zero. If you hold an equal quantity of short futures and long calls in the same stock, the delivery margin is charged on both the futures and the call contract, not netted to zero. The reason is that the delivery margin exists per leg because exiting one leg can revive a delivery obligation on the other. A trader who set up a net-flat hedge can still face a sizeable combined delivery margin in expiry week.

Why Zerodha blocks fresh deep-ITM and illiquid stock options near expiry

On top of the exchange margin ramp, Zerodha applies its own risk controls on stock options near expiry, aimed at positions likely to end in a physical-delivery obligation the client cannot fund:

Fresh deep-ITM stock options are restricted. A deep-in-the-money stock option bought close to expiry is almost certain to expire ITM and convert into a delivery obligation. Zerodha restricts opening such positions near expiry, because the physical-settlement risk is high and the delivery margin is large.
Market orders in illiquid stock options are disallowed. Zerodha does not allow market orders in illiquid index and stock option contracts. In an illiquid contract the bid-ask spread can sit far from the last traded price and the theoretical price, so a market order can fill at a poor price. This block is the same mechanism behind the theoretical-price rejection .
Square-off behaviour near expiry. Where a stock-option position carries a high delivery risk and the margin is not met, the position is liable to be squared off rather than carried into settlement.

These blocks are not arbitrary. They sit on the same fault line as the delivery-margin ramp: a stock option that ends ITM at expiry is a delivery, and a delivery requires either the full value of the shares (for a call exercise) or the shares themselves (for a put exercise or a short-call assignment). For a retail account that did not plan for delivery, that obligation can be far larger than the option premium and can draw interest and penalties.

The exit window: square off until 3:30 PM on expiry day

The way to avoid the rising delivery margin and the physical-settlement obligation is the same: exit the ITM stock option before expiry. You can square off an ITM stock-option position until 3:30 PM on expiry day. Closing earlier in expiry week avoids the steepest part of the margin ramp, and closing before expiry day removes the delivery obligation entirely.

The practical sequence for a trader holding a stock option that has drifted into the money in expiry week is:

Check whether the option is ITM and how the delivery margin is building each day on the Kite funds page .
Decide whether to take delivery (and fund it) or exit.
If exiting, square off before 3:30 PM on expiry day, and earlier if the delivery margin is straining the account.

A long ITM call that you do not want to convert into a share purchase must be sold before expiry. A short option that is ITM, where you would otherwise be assigned and required to deliver or take shares, must be bought back before expiry. Leaving an ITM stock option to expire is a decision to take physical delivery, with the Do Not Exercise facility now withdrawn for close-to-money strikes, so there is no automatic abandonment of an ITM stock option.

How this differs from index options

Index options, such as Nifty and Bank Nifty, are cash-settled, not physically settled. An ITM index option at expiry is settled in cash at its intrinsic value; there is no delivery of shares and no delivery-margin ramp. The restrictions in this article are specific to single-stock options and stock futures, where the settlement is in shares. This is the central reason expiry-week behaviour differs so sharply between index and single-stock derivatives, and why the delivery-margin ramp and the deep-ITM blocks appear only on stock names.

Practical consequences for a trader

The expiry-week restrictions reshape how you can hold and trade single-stock options in the last four days. You cannot treat a stock option the way you treat an index option, holding it cheaply to expiry and pocketing or abandoning the intrinsic value. From the previous Wednesday, an ITM stock option costs progressively more to hold in margin terms, and by expiry the margin approaches half the contract value. If you do not intend to take or give delivery, plan the exit before the ramp builds.

For option sellers the risk is sharpest. A short stock option that drifts ITM in expiry week carries both the rising delivery margin and the assignment risk, and a short call assigned at expiry obliges you to deliver shares you may not hold. Buy back short stock options that are ITM well before 3:30 PM on expiry day. The interaction with the F&O ban compounds this: if the stock is also in the ban, you cannot roll the short forward by writing fresh options that increase net delta, so the only route is to exit.

External references

References

Zerodha Support, “Why is a higher than usual margin blocked for my F&O trades close to expiry?”, support.zerodha.com (as of 21 June 2026): delivery margin from four days before expiry, indicative ramp near 10%, 25%, 45% and 70% of applicable VaR + ELM + Adhoc margin, scaling toward about 50% of contract value on expiry day; delivery margin is a non-upfront margin collectible to T+1; charged per leg.
Zerodha Support, “Policy on physical settlement of equity derivatives on expiry”, support.zerodha.com (as of 21 June 2026).
NSE, framework for compulsory physical settlement of stock derivatives, nseindia.com.
SEBI, circular on physical settlement of stock derivatives in the equity-derivatives segment, sebi.gov.in.

Frequently asked questions

Why does my margin keep rising on a stock option near expiry?

Because the exchange applies a physical-delivery margin ramp on in-the-money stock options from four days before expiry. The margin is a percentage of the underlying’s applicable margin and scales up each day toward expiry, reaching about 50% of contract value.

When does the delivery-margin ramp start at Zerodha?

Four days before expiry, that is from the previous week’s Wednesday through to expiry day, on in-the-money long option positions and on stock futures. It is charged in stages, indicatively near 10%, 25%, 45% and 70% of applicable margin across the days.

Why can't I buy a deep-ITM stock option close to expiry?

Zerodha blocks fresh deep-in-the-money and illiquid stock-option positions near expiry because they are likely to result in a physical-delivery obligation, and it disallows market orders in illiquid stock options where the spread is wide.

How do I avoid the delivery margin and physical settlement?

Square off the in-the-money stock option before expiry. You have until 3:30 PM on expiry day to close it. Exiting before the ramp builds also avoids the steeply rising delivery margin in the last few days.

Are delivery margins charged on a hedged position?

Yes. Delivery margins are charged on each F&O leg separately, even if your net delivery obligation is zero. A short future hedged by a long call is margined on both legs, because exiting one leg can revive a delivery obligation.

Is the delivery margin an upfront margin?

No. Delivery margin is a non-upfront margin, so a shortfall can be collected up to the next day (T+1). But holding an ITM position without the stipulated delivery margin draws a margin penalty, and Zerodha may square off the position.

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Last reviewed: 21 June 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.