How does the new physical settlement of stock derivatives work?


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?


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.)

  1. 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).

  2. 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.

  3. 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.



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 -

  1. 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
  2. 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.
  3. 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


I’ve never touched Options, I’ve traded with only Futures. My queries may be highly stupid as I’m a newbie, forgive me for that.

If a future is expiring on 26th July, then as per the new rule does it mean that:

  • I can’t enter a new position on or after 23rd July (in the current month future)
  • All my open positions will be squared off by 23rd
  • Since Zerodha squares off any open positions much in advance, there won’t be any need for cash settling for Zerodha customers (just like 3.20PM auto-square off)

f&o compulsory delivery

For all contracts, both ITM and OTM.

You need to close them, in case if you wish, you can take position in next month contract.


No cash settlement for futures, open future positions after close of trading on expiry day will result is settlement.

Long futures in to buy positions( stock receivable).
Short futures in to sell positions( stock payable).

After expiry, current month will result in to delivery, if you wish, can continue to hold next month future.


Your points are also relevant but considering physical settlement is happening for first time we do not want our clients to be trapped in a position which is not desired by them in 1st place. Brokers are also unaware of the complete risks involved and with out measuring the risk one can’t manage it. Poor management of this can jeopardize entire client base and can eventually lead to systemic risk.

We are starting with 4 day period for this expiry, may be for forthcoming expiries after this we can restructure our policy based on this outcome and feedback.


Hence we are informing upfront that as our company policy we don’t allow this for now.



Will start closing from 23rd, can be squared off any day after that, in case if they are not closed, client is solely liable for the obligations.


We will close starting from monday.

As we don’t allow to carry positions, this is not relevant for this expiry.

This is how we are starting, based on the outcome we are open to restructure this.


Thats unfortunate. I hope that it is applicable only for the list of 46 FnO stocks for now.


Yes, for those 46 only, all the above discussion is applicable on those 46 stocks only.


Please share more information.

I take real example I have PVR longs at 1300 and sold 1400 ce @ 18
Qty in cash 400 shares
1 lot sold @ 18 of 400 shares

so at expiry if if i do not cover my call which if price do not rally will be 0 my gain of call will be 18x400 lot size

what will happen in case of this new delivery thing.

as the buyer of call if he do not settle he will have to take delivery
as a seller of call i have to give delivery

so does it mean my 1300 entrt stock will be given to that guy ? who bought 1400 call
what about the price difference?

please shed some light and share thoughts


I hope it would not affect intraday trade. We can still take July f&o intraday (for those 46 securities) trade after 23th right?


Intraday also, if one want to do only intraday then it is as good as doing the same on next month contract. Hopefully enough liquidity will be available on next month contracts.


If PVR is in the list of physical settlement then one can’t carry positions beyond 20th, in case carried they will be force closed starting from 23rd. If PVR is not in that list then it will be cash settled as normally upon expiry.


PVR is in that list, My querry still remain

I have PVR cash long at 1300 price and sold call of strike 1400 @ 18
So this net difference between my entry and call strike + premium is 118 Rs

if i opt to give delivery in this case. will there be any credit of difference of this 118 given or simply the stocks will be delivered to some other person


In this case you have to close your call option before 20th, if not we will start closing from 23rd, so no point that this will be carried for physical settlement. This is how it will happen for this expiry at Zerodha.


Thank you for your time and valuable feedback,
Best wishes