How does the new physical settlement of stock derivatives work?

whats the issue everyone is discussing above, illiquid,itm calls , delivery, expiry,etc… im confused

I think this move will increase the volatility at the expiry and people will lose more money in F&O…

On these 46 scrips, assume you write a call option. Assume that on expiry day option is in the money and you are not able to buy back because the contract was illiquid (no sellers). Then you will be forced to hold onto the position after close. Contract automatically gets exercised. Which will mean you will have to deliver shares to the buyer of your call contract.

Hi. How would this affect an option writer. Suppose I wrote out of the money options. How does it effect me if say

  1. My written options are expiring out of the money i.e. they become 0 on expiry and stock price OTM.
  2. My written option becomes ITM by closing and let’s say I cannot square it off due to illiquid bid offer and stock becomes in the money but well below my written price.

Thanks in advance.

Here is one of the reasoning behind this SEBI move. Today if you are an operator with access to unlimited amounts of cash/stock, you can keep shorting/buying F&O contracts to move the stock in a particular direction without having to worry about placing a counter trade.

So assume a stock with lot size of 5000 is at Rs 100. An operator can keep selling futures/shorting calls to move the price down of this stock. On the expiry day, since everything is cash settled, he doesn’t have to worry about buying it back. Essentially making it very easy to manipulate the price. But going forward on these 46 scrips and soon on all F&O stocks, the operator will have to cover his positions or give/take delivery by putting full money. I think it will become extremely tough for people trying to manipulate stock prices in such F&O scrips.

  1. Nothing changes.
  2. If you write calls, you will have to give delivery of stock to the buyer of calls. If you write puts, you will have to take delivery from the buyer of puts.

They could have made it mandatory for big guys trading 10+ lots. Small traders like me will find it difficult to secure delivery without enough funds (i know not everytime, but chances are still there). I wish zerodha comes up with something to buy and sell such delivery (2 or 3 lots) with some small fee.

We can’t define what is big, sometimes option can be available at 10 paisa and even with lot size of 1000, it need only 100rs to buy one lot, so 1000rs to buy 10 lots so a client with 1000rs is not big right.

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Its not the premium. right? each lot should have 10L + value. So 10 lots should be definitely big.

Is it possible for anyone/operator to move prices of a stock/futures just by increasing volumes??
I think SEBI may have some guidelines for traders to keep their positions to a limit. for example if i want to create big position in a stock future sebi will allow me only say @ 10% or 20% of the total market wide limit, isn’t it??
another thing is can anyone move the stock price just by trading in F&O?? i mean doesn’t he have to trade in cash to move the stock price as the F&O price are mostly dependent on their underlying stock price.

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To buy option, if you have premium amount that is enough, for writing option one need some % of total contract value.

I understand that. My concern is on taking delivery of 10 lots on expiry.

And imagine frustration of trader who spends 1000rs in premium forced to spend 1cr fund for taking delivery. This is very disappointing move.


what earlier used to happen before the new circular… can’t we rollover… or best thing to stay away from such situations or to get out

Buyer is not forced if option expires OTM or if he manages to close the contract before expiry, only problem when he let it expire ITM, also we need to wait few more days to know the exact mechanism.

Just to provide some info on this, this is how all advanced(developed) markets function, so we may wish we are moving in the right direction, also this move should hopefully limit operators manipulating stock prices and may help in reviewing SLB ( stock lending and borrowing) market in India, said this initially we may witness less liquidity, higher impact costs but should be sorted in long term.


Thanks for writing this bhaiya. Now can you please explain it in layman language? :smiley: with examples and scenarios if possible


Please explain this current change in context with the STT rule change which happened last year

Here is the link for the topic
STT Rule

It’s getting confusing.


The open interest limit is per client, per trading member. Operators can take positions using multiple client and trading members. Theoretically yeah stock is the underlying for future, but if more trading volumes are happening on F&O, F&O usually drives the stock price. There will be arbitrageurs anyways ensuring both cash and F&O move in sync.


Of course you can rollover - which is exit the current month and take a next month contract. The issue is if you are not able to exit an in the money contract of this month because of liquidity.

:slight_smile: This isn’t a simple thing to explain in layman language. Can you ask me specifically what you didn’t understand?

I am hoping that exchange will continue to have the existing facility of do-not-exercise on close to money contracts (CTM). We will have to wait on exchange clarification on this.

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