Imagine i have 1500 quantity in cash taken for delivery. Also i have created shorted one lot of CE option in tatamotors which also has 1500 quantity. Then do i need to release this 1500 qty lying in DP to the exchange at the time of expiry. (something like covered call) but this in cash taken on delivery and against that at the money call i have created short.
What is the value of stock lying in DP. Say i will give a real example. Tatamotors CMP 287 and i have shorted 290 CE @ 11.9.
At expiry price goes to 260 and this CE goes to 0 while CMP is 260. If i release this 1500 qty in DP, then do i need to pay anything more other than 1500 qty stock.
Secondly, since i have already 1500 qty in cash in DP, if i short 290 CE @ 11.9 x 1500= 17,850, what margin do i have to keep for this short. As it is already hedged with cash delivery till expiry.
Please explain in detail.
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Hi,
How will physical delivery will impact if I have bought/sold one CE along with one PE of stock option(without owning underlying stocks) and keep it to expire without exiting at expiry?
Will the effect be null or will I get penalty at both sides for not having stocks which I obliged to provide and not having enough capital to oblige stocks which I need to purchase?
How is physical delivery mechanism implemented in futures and options combination as well ?
Thanks.
Exchanges are yet to provide clarity on this. I am hoping the effect will be null.
Agreed. The effect maybe NULL but the penalties will probably be twice. Since the fees/fines essentially involves the cost of warehousing and clearing by clearing member. You have CME commodities as a precedent here … and essentially they are bearing the cost of clearing two contracts even if the overall effect on physical delivery of it is NULL for the same person.
Phew, looks like this won’t be as scary as it seemed. Check this circular.
In respect of option contracts where buyer has opted for do-notexercise such contracts shall not be exercised.
This means the buyer of an option will get to select if he wants to exercise or not, and it won’t be compulsory delivery. So 
Copy pasting Annexure 1 from the above circular,
ANNEXURE 1
ITEM 1- SETTLEMENT PROCEDURE1.1 The following positions in respect of contracts identified by Exchange shall be physically settled: All open futures positions after close of trading on expiry day All in-the-money contracts which are exercised and assigned
1.2 The current facility of do-not-exercise provided for Close to Money (CTM) option contracts shall continue to be applicable in respect of stocks which are identified for physical settlement. In respect of option contracts where buyer has opted for do-notexercise such contracts shall not be exercised.
1.3 The settlement obligations shall be computed as under a. Unexpired Futures Long futures shall result into a buy (security receivable) positions Short futures shall result into a sell (security deliverable) positions b. In-the-money call options Long call exercised shall result into a buy (security receivable) positions Short call assigned shall result into a sell (security deliverable) positions c. In-the-money put options Long put exercised shall result into a sell (security deliverable) positions Short put assigned shall result into a buy (security receivable) positions The quantity to be delivered/ received shall be equivalent to the market lot * number of contracts which result into physical settlement
1.4 The settlement obligation value shall be computed as under a. Futures – Settlement obligations shall be computed at futures final settlement price of the respective contract. (The difference between previous day settlement price/trade price and final settlement price on the expiry date shall be cash settled along with daily MTM on T+1 basis as currently being done) b. Options – Settlement obligation shall be computed at respective strike prices of the option contracts
1.5 The final deliverable/receivable positions at a clearing member shall be arrived after netting the obligations of all clients/constituent/trading members clearing through the respective clearing member.
1.6 Physical settlement of securities shall be done only in dematerialized mode through the depositories.
ITEM 2- SETTLEMENT SCHEDULE
2.1 The physical settlement shall be effected on Expiry+2 days in accordance with the settlement schedule issued by the Clearing Corporation periodically.
2.2 The delivering clearing member shall complete delivery instructions for transfer of securities to Depository pool account on settlement day by 2.00 pm or such cut-off time as stipulated by the respective depositories. The depositories shall credit the receiving members’ pool account / clients’ beneficiary account in accordance with the pay-out instructions received electronically from Clearing Corporation on the settlement day. A new settlement type shall be introduced in consultation with depositories to facilitate separate identification.
2.3 The funds paying clearing member shall have clear funds in his settlement account on settlement day. The clearing bank shall debit the paying members’ account by 2.00 pm. in accordance with electronic instructions received from Clearing Corporation. The Clearing Bank shall credit the receiving members’ settlement account in accordance with the payout instructions received electronically from the Clearing Corporation on the settlement day.
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Sounds great!
Equally important is that futures will result in having a Delivery obligation, which’ll force operators ot perhaps square off their positions before expiry.
Either will result in less volatility or more? 
Circular says all ITM option contracts which are exercised & assigned
Does this mean which are exercised and assigned after close on expiry day?
That clarification is available for the future contracts but for itm options what’s the scenario?
I believe broker has final call on this, I mean whether to let it go for cash settled or for physical settlement and broker can decide based on request he receive from buyer of ITM options provided if buyer has full margin or not to take delivery.
So as long as we sq off any open short option positions before expiry, option writer should be fine, correct?
Right.
Nice way to go about it … … Cool.
I have pledged 7000 shares of BALRAMCHIN and sold July 2018 80 CE. In reference to NSE Circular # 67/2018 dated June 15 2018; if 80 CE ends In-the-money and I am not able to square it off for some reason, shall I be able to meet my obligation of physical delivery of shares by placing an unpledge request on 27 July 2018 (the day after expiry)?
@nithin Could you please confirm if the other stock and nifty and bank nifty index we can trade as before ( keep till expiry) ?
Dude, when someone is taking time and efforts to answer a question the least you can do is to first search the thread if the question has been answered. This query has been answered multiple times on the same thread!
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Zerodha F&O square-off 4 days prior to Expiry. Is it valid only for In-the-Money options or even Out-Of-Money options? What if I am an option writer and currently has exposure to out-of-money options?
I can understand about long futures position cash settled but can you please explain, how the short futures contract cash settled?
And, also explain how the future calendar spread order settled?
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Hi @nithin
This mandatory square-off 4 days before expiry will be very restrictive for active traders. Please give the following points a look. From a trader’s vantage point, I feel that a 2-day or a 1-day before expiry day square-off would have been sufficient for the broker to take care of the issues mentioned in zerodha’s policy email notice.
(Currently, its only these few stocks in physical settlement but say one year down, there would be most of the stocks in physical settlement.)
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Till now the second month FUTURE contracts had very low liquidity till 2-3 days before expiry. (I hope this will change from this month onwards).
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The (stock) options will have a lot of time value left 4 days before expiry. The option writer trading through zerodha will have to let go of the time value. The decay happens so fast in the last week.
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You are basically saying that zerodha users will not participate at all in the physical settlement process. Because, none of my open positions will be allowed to be expired. Hence, I can not do cash-to-futures arbitrage. Covered calls etc. Even if I have the underlying shares in my zerodha demat and I want to sell futures against it or calls against it and let it settle physically, I wont be allowed to do it?
Please correct me if I have misunderstood any of the above mentioned situations.
I am looking forward to knowing the rationale for a 4-day period compared to a 2-day square-off.
Thanks
I have a similar question. I may like to physically settle options via taking or providing delivery of stocks.
Hi @nithin : can you please explain the rationale behind the policy of auto square off and not allowing new positions 4 days prior to expiry. Is this policy a stop gap arrangement only for July expiry or will this be the norm for all future expiries as well.
This policy is no way beneficial and is infact detrimental to fno traders. I don’t want to sound harsh but in this case, I believe Zerodha has exceeded its brief and amounts to unwanted interference in clients trading in the name of risk management.
The ideal and the correct policy should be to auto square off one hour before expiry. FnO future contracts are liquid enough for auto square off. As regards options, only ITM options require delivery; all other strikes (90% of the strikes) will be OTM. Also, for long ITM options, the buyer has the choice to opt for no delivery, so effectively the risk is only on the ITM shorts for delivery - which is what you should try and restrict and that too only on the expiry day. I do understand and appreciate the fact that ITM or OTM can be known only on settlement, but there has to be a better policy surely than the current one.
Also, kindly request if you can reply to the below queries -
- can you confirm 4 days prior to expiry means open positions will be auto squared off by Friday EoD (prior expiry week) or Monday EoD (expiry week) for a normal Thursday expiry
- Will you be providing the option to mark ITM long options for no delivery. If yes, please let us know the process for the same.
- Can you provide more clarity on how physical settlement will work for cases wherein the net position for delivery at the client level is zero.
for e.g. if i am long futures (receive delivery) and have a long put option of the same quantity (make delivery) which is ITM on expiry
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