This is an issue that was debated by the regulator and the brokers and the regulator has decided to make an exception for what is called CTM (close-to-money) options. These CTM options are also ITM options but they have very marginal intrinsic value. These CTM options have been defined in the rules as under:

· In the case of Call Options, 3 ITM options strikes immediately below the final settlement price shall be considered as CTM or close to money.

· In the case of Put Options, 3 ITM options strikes immediately above the final settlement price will be considered as CTM.

Why is this CTM classification important? It is clear that there is no question of delivery in case of OTM options as they are assumed to expire worthless. In case of ITM options (other than CTM), it will result in taking delivery or giving delivery of shares. The only exception is the CTM options.

Exchanges have provided an option to not exercise CTM contracts and this is mainly to avoid unnecessary costs. In such cases, the broker can choose to no exercise these options and let them expire worthless. Normally, brokers will use this CTM logic if the trader has not brought in adequate margins.