How does the new physical settlement of stock derivatives work?


Big guy’s always refer US markets, & their market is well developed , they have liquid far ahead expiry’s ( even more than years) option contracts. we need to be practical, in our market only index contracts , that too only up to 2 months are liquid & in case of Stocks options , only present month contracts are liquid ( thanks to SEBI that will too going to be illiquid !!! ) its annoying to trade far months contracts. SEBI can reduce manipulation " by reducing individual stock weight age in a particular indices " , lets say equal weight-age , instead of taking corrective actions SEBI is doing opposite & oppressive action . If HDFC Bank weight-age is less than 30 % of Bank nifty or say around 8 % , todays insane action Bank nifty does not happens.


I think the stock options volumes will likely to go down drastically! On the positive side I think the index options will spike up. For options writes like me this is something bit of a hassle as I need to ensure I square off my potions.

Though I have my doubts, I hope the exchanges have some kind of effective mechanisms to protect retail investors.

SEBI is really tightening up the FNO rules like the SPAN margin rules for option writes which are effective June’18 all of which is making things difficult to retail investors like us. Will it benefit the markets in the long run is something we have to wait and watch.


@nithin So this wont be applicable on INDEX? Am I right?


No, it won’t be.




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.



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 ?



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 :slight_smile:

Copy pasting Annexure 1 from the above circular,


1.1 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.


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.


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? :stuck_out_tongue:


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?




Nice way to go about it … :slight_smile: … 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!


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?