Arbitrage Trading with Physical settlement

Has cash / futures arbitrage trading become any easier with compulsory physical settlement of futures contracts ? One will not have to wait for cash / futures price to converge on expiry day to close the position. If we spot a difference then can we buy in cash and sell in futures and forget the trade ? On expiry shares can automatically be debited from demat account to square off future sell trade. More importantly i wish to know that whether such opportunities actually exist for a retail trader to take advantage of or is it just a game for algos running on super computers ? And will zerodha charge 0.5% brokerage on such trades which are taken with intention of arbitrage, as such high brokerage wont leave anything on the table for the trader.

Yes, while C&C arbitrages have always existed, due to most brokers disallowing clients to trade closer to expiry, the spreads are higher. This will come down once most brokers are equipped to handle physical delivery and trades can take more trades in the current month expiry.

Yes, they do exist. However, the margin requirements inhibit retail traders from utilizing such opportunities.

Unfortunately, we have to charge this for the short futures position as we carry a risk incase you choose to sell the stocks before the expiry leaving the futures position unhedged.

How does it have risk when contract is already expired , if trader is having say 100 stock in his demat and shorted 100 share in future. In this case I don’t think there is any risk on behalf of future. Also if one sold stock before expiry that would not be the case for arbitrage and trader may suffer penalty if not having stock.

Thanks for your reply. If there is some system of client marking intent to give delivery coupled with maybe an early payin or broker locking those shares then the risk of client selling his holding before expiry can be mitigated. But yes it should be worthwhile for the broker also to develop such systems.

We are considering ways through which we could reduce the inconvenience caused due to physical settlement is reduced.
For now, you can pledge the deliverable stocks and get collateral margin. This will fulfill the increased margin requirements in the last 2 days before the expiry. You need to place an unpledge request before 2 PM on Thursday. These shares will get unpledged and will be used to fulfill the physical delivery obligation.