Previously in this column, we discussed the costs and risks associated with long call position that is open till expiry. To recap, you are exposed to delivery margins and high cost of exercise if your long call position becomes in-the-money (ITM) as it approaches expiry. This week, we discuss the risks associated with short call position that is open till expiry.

Time decay benefit

Short call positions benefit from time decay – the loss in time value of an option with each passing day. This happens because options carry finite life. The time value of the option must become zero at expiry. The loss in time value is not the same every day; it accelerates as the option approaches expiry day. This argument seems to suggest that it pays to keep your short call position open till expiry. That way, you can realise maximum gains from the short position, which is equal to the premium you receive when you initiate a short position. There are, however, several factors to consider. 

One, brokers levy margins on your short position. NSE takes four snapshots of your positions during a trading day. If your account falls short of the margin based on the highest price during these four snapshots, your account will attract shortfall penalty. Note that this margin is applicable for all the days your short position is open. But these margins are higher on expiry day because of higher volatility. Two, the higher volatility on the expiry day exposes your short position to high (gamma) risk. Suppose you have an at-the-money (ATM) strike, a small increase in the underlying price will make this strike ITM. Now, open ITM equity call position at expiry means you will have to deliver shares based on the option’s permitted lot size. While delivery risk is lower for out-of-the-money (OTM) options, you must be mindful of the risk if you hold a naked short position in the immediate OTM strike. 

Perhaps, an optimal course of action would be to close your short position on Monday, the day before expiry. The trade-off? You give up small gains, which is the residual (remaining) time value on the naked short call you hold. But you can avoid the delivery risk and the risk of spike in option price on expiry day because of high price volatility. 

Optional Reading

A bear call spread can reduce delivery risk, as it involves going short on a lower strike and long on a higher strike call. You will still be exposed to the risk of shortfall in peak margin if the underlying price increases. This is because the short call will increase faster than your long call position. The upshot? As with naked short call, it is optimal to close your bear call spread a day before expiry. If you carry a naked short call position, or a bear call spread on the day of expiry, consider closing the position before 3 pm.

(The author offers training programmes for individuals to manage their personal investments)

Published on November 7, 2026