How does the new physical settlement of stock derivatives work?


Sorry Siva. My question was not clear. I was asking about markets, like in US, how it works.

You had mentioned they already have take/give delivery approach and we are going to follow them. So before our exchanges announces actual workflow, just curious to know how they works.


In order to implement this drastic move, any consideration of reducing the mammoth Lot Size of F&O Stocks?

In other words, SEBI just wants to minimize the retail participation to the utmost. These steps are not friendly for somebody who lives by the leverage. On top of other Charges, GST and Taxes, we are charged STT. :fearful:

@Nithin your opinion please!


SEBI is planning to increase, but may not as few stocks are already hitting 10lakh contract size.


As you said that if one closes the position before the expiry he will not have to give/take delivery of the stocks and it be cash settled… in this case such rules doesn’t make any sense… and as you explained the operator thing they will still continue to manipulate stock prices… isn’t it?

Infact such rules seems to be favouring operators!!!


@dp1980 Even I think the same. In between expiry they will not be bothered. But as expiry nears, I think they will desist from manipulation. Most probably they will move on to far expiry contracts.


yes, but it doesn’t matter weather they trade in near month contract or far month contract. everyone will try to close their positions before expiry to avoid deliveries…
and this is where the operators will be benefited!!!

salute to SEBI for bringing another non sense rule to destroy the retail traders and favour the operators!!!


Does anyone know if physical settlement will be for only options which are ITM at expiration and OTM options will still don’t have to be physically settled?


hmm… I’d guess trading on stock options will drop off significantly. Everything will move to index options.


Yes, hopefully this should be possible. Waiting on exchange FAQ on this. But this would mean you bringing in additional margin to short the OTM call.


No, you didn’t get the point. An operator who has taken huge positions, can’t come and cover back the position in the market. If he does, he will automatically push the market in opposite direction. Today he will be able to just let it expire worthless without having to cover.


Of course, OTM options by definition are worthless. They can’t be settled in any way.


Kudos to SEBI on this point !
But I am angry on them for high lot sizes.


Is that not ITM call? Only then, for his long call deep ITM delivery, can be given back for the shorted ITM call. If it is OTM call that is shorted, it would expire worthless, and will have to take delivery for the first long call, which is deep ITM.


BANKNIFTY went up by 800 points supported mostly by 3 banks !!!
I hope physical settlement will bring down such manipulations. or does it ?


In my opinion manipulation will not come down, Bank nifty is manged by Big guy’s by manipulating " HDFC Bank stock" and also already , imposing extra margin" system during volatile period exists. more over all the stocks which are in Bank nifty indices are not in Physical settlement list , so problem will be with stocks , which have physical settlement ,


But what happened today in BANKNIFTY was insane. I hope Zerodha wont square off my positions as I think markets will revert back soon. @nithin
You are right, no stocks in BN are under physical settlement. I hope physical settlement will be applicable on all stocks asap.


Sorry didn’t get your question.

If you are long in the money call and short out of the money call. The out of the money call will expire worthless, there won’t be any delivery to it. So this position can’t be netted off.

Like I said, I am not sure if these can actually be netted off. Need to wait on exchange clarification.


I am a option ( hope) buyer, not seller , Future buyer & seller , , i am against manipulation / in sane thing , but i don’t want all the FNO stock’s going to Physical settlement , otherwise one of the market opportunity will go off!!! and there is no point in trading . i don;t want to be just a " Mutual Fund Buyer ":disappointed_relieved:


I was suggesting this as to avoid deliveries.

Say, I am Long SBI CE 240.
Let us say, SBI has moved up to 270, and on the expiry day, I am unable to sell my SBI CE240 at reasonable price as it has become deep in the money. That would mean taking delivery of SBI shares at 240.
Instead, sell SBI CE260, which has buyers.

I Contract Long SBI CE 240.
II Contract Short SBI CE 260.

The I contract results in delivery to me, and for the II contract, I need to deliver. So if these are netted, then there will not be any delivery.
I am looking at this as a possible way out of taking deliveries, and since I hold CE240, would there be a margin requirement to sell CE260, as there is no risk involved :grinning:


@TIMEFRAME No No ! Physical settlement will tame the manipulation happening now. Read what Nithin Kamat has said above. In US markets individual stock derivatives are physically settled. It is a good thing.