Last year, NSE had discontinued DNE. But with physical delivery, traders were suddenly on the hook if OTM options suddenly became ITM:
The risk though comes from out of the money options that suddenly turn in the money on the last day of expiry. No additional margins are blocked for OTM options in the expiry week, and when it suddenly turns in the money, a customer with small amounts of premium and no margin can get assigned to give or take large delivery positions, causing significant risk to the trader and the brokerage firm.
DNE facility is available only for the CTM (Close to the Money) contracts:
For Call Options: 3 ITM options strikes immediately below the final settlement price are considered as ‘CTM’.
For Put Options: 3 ITM options strikes immediately above the final settlement price are considered as ‘CTM’.
Option strikes beyond these will be physically settled. Also, only stockbrokers can use this option of DNE. If an investor has insufficient holdings or funds for settlement, the stockbroker could use the DNE facility to avoid default. This is especially useful if an option becomes due for settlement in the last few minutes of market close on expiry.
This rule is useful if an option becomes due for settlement in the last few minutes of market close on expiry. As explained above:
The risk though comes from out of the money options that suddenly turn in the money on the last day of expiry. No additional margins are blocked for OTM options in the expiry week, and when it suddenly turns in the money, a customer with small amounts of premium and no margin can get assigned to give or take large delivery positions, causing significant risk to the trader and the brokerage firm.
Experts say SEBI’s flip-flop on Do Not Exercise facility is a classic case of bureaucratic overreach where a handful of powerful people altered the fate of thousands.
This DNE means that now any CTM strike (3strikes ITM from ATM for both CE and PE)- will not be physically settled but will be cash settled , like index
When DNE option is used, how does it affect the option seller?
For Example -
I own 1 lot of IOC,
sold a covered call i.e. 125 CE for INR 3 (i.e. 6500 x 3 = 19,500),
Current stock price 130 (MTM loss in sold 125 CE = 18k)
Currently the option is ITM but if it becomes CTM (125<=CTM<=128) and if the buyer doesn’t have enough money to take delivery, do I get to keep both the premium and the stock?
Or I get to keep the stock and have to bear the loss on sold 125 CE?
Hi Nithin,
Just read bse is moving to cash settlement for all options from April 29th expiry onwards.
Why nse is doing reverse…and removing DNE Is also bad…
many reatailers lose by paying hefty premium at the start and might gsin 1 in 10 at the last if options are cash settled.
I hope if bse cash settlement is true… the volumes should pick up there and nse has to switch back to previous mode.
They are changing meaning of OPTIONS itself…
Your thoughts on this
The DNE option has been removed because of SEBI and not due to exchanges. So BSE isn’t going to cash settlement. Only the index derivatives on BSE are cash-settled, but so are on NSE.
The issue with DNE is that everyone with a strategy involving give-or-take delivery can get screwed if suddenly some positions don’t lead to give-or-take delivery because option buyers opted for DNE. Unlikely that the DNE option will be reintroduced.
Given that now the settlement of stocks and stock derivatives will happen at the same time, we are requesting SEBI/Exchanges to consider allowing regular trading activity in the post-market session between 3.40 pm to 4.00 pm, but only in the equity segment. Any option holder could buy stocks in that session to ensure that there is stock to deliver the next day when there is physical delivery of options. While we have a post-market session, it isn’t active, as all trading can happen only at the closing price. So usually, there isn’t enough liquidity if someone has to buy stocks, or there will be only buyers and no sellers.
