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If your F&O position, especially in illiquid options, can't be squared off, you might have to exit using a market order at a very unfavourable price, sometimes even if the bid-ask spread is wide. Brokers usually auto-square off such positions nearing expiry or if you face a margin call, to prevent further risk. For in-the-money (ITM) options, failure to square off can result in physical settlement, incurring significant capital requirements and potential penalties.

Bottom line: Not being able to square off usually means a forced exit at a bad price, or physical settlement risk if it's an ITM option.