Why does an option buyer (say call buy) ITMneed to settle for the stock? Doesn’t an option buyer have the right to buy or not to buy? His loss would be the premium paid if lapsed. Why is physical settlement for stocks required in the case of ITM??
It is true that Option Buyer has right but not an obligation to receive underlying shares (Long Call) or to deliver underlying shares (Long Put) but when he is letting his Option expire that right turns into obligation when Option expires ITM.
SEBI made physical settlement mandatory for Stock F&O to crub speculation and volatility, it is required in case of ITM because those Options have value, if it expires OTM the Option expires worthless and there is no obligation to fulfill.
Also, client/broker can chose not to excercise but you will lose the premium, we do not allow this at Zerodha but what we do is on Thursday (Expire Day) we mark all low intrinsic value contracts as do not excercise. These are contracts that expire at ATM, and the brokerage and STT will be more than the intrinsic value.