How does the new physical settlement of stock derivatives work?


@nithin I saw this NSE circular which lists 46 stocks and that they will be physically settled. Could you please explain how will this exactly work and how do you see it impacting the derivatives and the cash market.

Physical Delivery implementation on multiple legs of Stock Futures/Options

PS: 15th June, 2018, latest update by exchange.

Do go through this SEBI circular.

It has been decided that physical settlement of stock derivatives shall be made mandatory in a phased/calibrated manner

So yes, we are starting off with this list of 46 stocks, but soon all the 170+ stock F&O contracts will be physically settled. I am guessing by end of this calendar year. All index derivatives will continue to be cash settled. This is similar to most international developed markets.

July F&O contracts of these 46 stocks are already compulsory physical delivery. What this means is that if you don’t square off your F&O positions in these stocks before close of trading on July expiry day, you will either have to take delivery (long futures, long calls, short puts) or give delivery of the stock (short futures, long puts, short calls).

As futures and short options you will already have put between 20 to 30% margin of the overall contract value to take a position. But with option considering you get to take a position by putting up a small premium, you will have a much smaller % of the overall contract committed to the trade. What this would mean is that post expiry, if any F&O position is open, you will have to bring in 100% money/stock to either take or give delivery. This could mean a much higher liability on you. So important all of you exit it before close of market, if you don’t intend to take/give delivery. The risk you would carry will be on illiquid contracts, where you are not able to exit even if you wish to.

How will all of this work?

NSE is yet to announce the mechanism. But if I had to guess, I’d say exchange will give two days post the close of expiry for settling of all these automatically exercised positions. So on Expiry +2 days take delivery of the stock or give delivery of the stock. I am guessing settlement timing for this will be post the normal equity settlement timing which is around 11 am in the morning. This will give an option for people to buy stock in the market post expiry day and then deliver on Expiry + 2 days to avoid auction if short futures/long puts/Short calls without holding the underlying stock.

I will update this thread as and when we hear more from the exchange.



In this case, i request you to add a feature whereby you square off any FNO positions on expiry @ say 3 p.m by DEFAULT.

you can give an option for square off by default or not option.

This would greatly reduce the risk for us incase we forget or are unable to square off FNO positions on expiry days.

I think many will agree with this feature.

Please take this feature request on top priority.


Nithin, what about the delivery of shares in case we have bought an option and don’t square it off before expiry?


To know the exact settlement mechanism we need to wait few more days till all the details are released by regulators.


I will say then SEBI should also put sleep to some charges which we are paying for them for utility charges.
Second we have already Auto square off facility then why this kind liability to retail users.
you should increase your servers and load sharing machine (Infra structure ) To hold this kind of auto square off facility.

Second if this going to happen then please introduce a mini lot version or multiples of 10 or 2 in stocks futures in case any one forget so liability will be less.

*In safe side don’t trade in futures trade in stocks which is best and stop using margin use delivery type of swing trading. See history knows that always a long term delivery traders are winner of this market and you know them better… (I Say no to futures and options i am happy with Equity and etf and stop margin trading…

we Indians never unite on such situation we rather use to face the consequences but nobody try to speak up. 1) Same happen when LCTG removed and the forget to remove STT no body speaks now this.
but they are unable to stop trading SGXnifty in Singapore exchange.


Few clients want to participate in physical delivery, so blanket square off may not be viable option.

One may buy multiples of mini, same exposure in that case, also SEBI want to make contract value 10 lakhs in futures per lot so, mini lot version is ruled out.

This is your perspective, others may have different view.

Still case is going on, as of now NSE is having upper hand.


Of course we will try to have some mechanism to auto square off positions for those who don’t want to take/give delivery. But the real issue here is, what if that option contract is illiquid, if there is no opposite party to the trade, how do you square off.


Nithin, Correct me if I am wrong.

It appears that the issue is only for In-the-money options in those 46 F&O stocks. All out-of-money options expire worthless so no issues. For in-the-money options, I guess one can either roll-over the option to next series or square-off before expiry (assuming there is enough liquidity)


So this move will kick out small retail traders like me, who does not have 10L in funds, from trading f&o??



Then put a big disclaimer for those who opt for auto square off. They know the risks trading FNO and if they don’t , they should not be trading FNO at all.


No,it says contract value ( price *lot size) for1 lot of fut contract is 10 lakh, already few stocks has reached that value, the above statement is answer for SEBI not coming out with mini lot sizes.




Okay. Understood that statement.

My worry is, suddenly of some contract becomes illiquid because of premium shoot up after purchase (any popular scrip, like sbi CE ATM), we will not be able to take delivery by paying 10lacs right.

I don’t have much experience in option trading. Probably you can help me from your experience. Is there any chance a contract become illiquid because it went deep in money?


so margins for intraday would be same?


It may or may not but the spread between bid and ask may be little higher.


Mostly, yes.


Yes, I agree… some times platforms becomes unstable to log in or trade… in that scenarios, this will help a lot.


If i write an option one day before expiry and square it off on expiry day… how things will effect me as a trader…


No changes, the same as of now.