I am a new derivatives trader and generally execute option selling. I sell in quantities like 50,000 or so. In most cases, the premium reduces to ₹0.05 on expiry day. So, is it the last amount of premium reduction or should I avoid squaring off the position, if the option is OTM?
The first thing I would like to tell you is to reduce the quantity without any second thoughts. You must understand that derivatives, if not handled appropriately, can cause huge losses. So, even if quantities like 50,000 appear to be small compared to your overall trading capital, it is not the right way to start trading futures and options (F&O). This is especially true with option selling as theoretically, the loss is unlimited.
Now, this is not to say that you should not trade in options. But first things first. Try to understand options as a product, like how they are priced and what are the risks involved etc. And never hold plain-vanilla short positions in options.
Coming to the option premium on expiry day, out-of-the-money (OTM) options expire worthless. That means, on expiry, the price of these options will be zero. Of course, you will see ₹0.05 in OTM options closer to expiry. But this is the Last Traded Price (LTP) and not the value of that option on expiry.
Typically, deep OTM options will have bid-ask as ₹0 and ₹0.05. This can lead to someone buying an option at ₹0.05 and this is the lowest price at which it can be bought. This may continue to happen until the end of the session and so, for this reason, the LTP could remain at ₹0.05 until the end. This can lead us to believe that the option value is ₹0.05. But actually, the value of OTM options on expiry will be zero.
In most cases, if the premium drops to ₹0.05, you can leave the position as it is. Because those options will usually have very little scope of recovery, especially on an expiry day. Yet, you should also consider the time to expiry and the difference between the strike price of the option that you have sold and the current market price of the underlying asset. If there are ample time, remember, there is always a scope for recovery, which may not be good for option sellers.