So, after a fairly successful stint in delivery trading in the equity section, I’m moving into futures trading because of the increased leverage. I generally hold trades for 3-5 days.
Can someone explain to me what the physical settlement (as per SEBI) means for me? Is this something that applies only on expiry days or every time I settle a contract? Does this mean I’ll have to take physical delivery of the stocks?
only happens on expiry day. if u did not cover your position at the end of day, you have to accept that sock in your acc, for that u will have to maintain margin. if you dont have enough margin for physical delivery, zerodha will exit your position before end of expiry. Its not clear when they will exit your position, i think its anytime in final weak of expiry. Because i received notification on monday for Thursday expiry to add margin, to prevent auto square.
Two questions??
What was the earlier behavior (prior to this circular by SEBI)? Would my contract have been auto-squared off at expiry?
How are you considering dealing with this? Ending trades/rolling over the previous week?
For index option there is no phsical delivery, for index option we only have to pay extra tax if we didnt square off our position before expiry.
Before this we can just hold it till expiry and pay little bit extra tax called STT for not squaring off.
Right now we have no choice, Zerodha will ask you to add margin or exit your position on monday itself of expiry weak. So because of this early exit we loose lot of profits.
i made a thread about this last weak but it was hidden by Mod, i dont know why but probably it tells the current situation of broker.
my thread was about:
i bought tata elx 750 put option on the day of earning result. it was crashing everyday so i held it till last week. So last monday stock broke 680rs support and i expected it to go 650rs. But it was expiry week so i got email and sms from zerodha to add margin for thurdays expiry or my position will be squared off.
As my put is deep in the money there was hardly any buyers with true value. its true value at that time is atleast 70rs but LTP was showing only 50rs so if i let zerodha square off i will loose big chunk of profit. at the end i had to square of for 63 rs loosing 7rs per lot, which is 4200rs per lot.
But here is the worse part, as i expected stock reached 650rs and even broke 650 support, so on expiry day it was at 640rs. because im forced to exit my position i missed 40rs per lot which is 24,000rs per lot. so now u see why this physical delivery become big slap on face of option buyers.
We’ve explained the process of physical settlement in this post on Z-Connect. To explain in brief, stock derivatives which were cash-settled(based on the close price on the expiry), will now be physically settled. If you have a long call, short put or long future, you will have to take delivery of the stocks and give delivery of stocks, if you have short call, long put or short future position.
@Joe_Maxpayne, as much as I understand your concern about not having to hold the position till expiry, due to physical delivery, the broker has to close your position early if you dont have the stocks(since you have a long put position) in your demat account to deliver to the counterparty.
It is very difficult to find liquidity in ITM physically delivered contracts as the expiry approaches or even worse if the contract ends up being physically settled, since you don’t have the stocks, it will end up in short delivery auction, where you could be charged upto 20% of the contract value. Read up on consequences of short delivery here.
Yes i know the new rules Faisal. my complain is on SEBI’s new changes not on Broker, we traders must speak out otherwise they wont revert it. They implemented this to prevent people sitting with crores of cash moving the stock at their direction which multiplies their money in derivative market at the time of expiry. But will it stop them? no. They will just accept the physical delivery and sell it back next possible days. only people that gets hurt is traders like us. If SEBI is smart they Can just ban the client who abusing this, because they can see who moving the stock.
@Joe_Maxpayne @nithin Joe the physical delivery is brought in because of the very reason traders are using this options on scrips as gambling. Over to basics why we buy a long put option? As an insurance. A true investor with one lot or more in his demat wants to insure his investment on volatile events period. So he hedges and buys a put option as premium. If he feels stock is crashing to the worst he waits until final day and give delivery from his demat. He has rightfully sold his investment at much higher price than cmp.
If his put option expires worthless he is still happy as his investment has not crashed
Where is trader coming here and playing?
Tell me how do u buy nifty share? you cant, because it dont exist. FnO is for traders where investors also take advantage. If FnO is gambling then delivery too, both FnO and delivery are bought for same reason, to make profit. you buy stock expecting it to go up, why do u think we buy FnO?