NSE has reintroduced DNE (Do Not Exercise) form April 28th 2022

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.

Thankfully, NSE has reintroduced DNE from April 28th.

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So now margins will not be continuously increased to total contract value on final 4 days?

Is this for all stocks or only particular list of stocks ?

No changes in this. Margins for Long ITM Options will increase in phased manner from expiry minus 4 days, just like they do now.

This is for Option contracts for stocks that trade in the F&O segment.

I don’t understand what this change mean? If the margins are still going to be increased in phased manner.

Does this DNE rule applies only to ‘Close to the Money’ contracts or ITM and ‘Deep ITM’ contracts as well ?

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.

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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.

You can check out this post for more details:

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.

Zerodha please advise,

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

Explained above: NSE has reintroduced DNE (Do Not Exercise) form April 28th 2022 - #8 by ShubhS9

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?

Appreciate your clarification, thanks.

@ShubhS9 @Bhuvan @nithin @velu
Can u please?

Yep, you get to keep the premium and the stock if the buyer doesn’t exercise for any reason.

Noted, thanks @nithin.