Physical settlement of stock derivatives : no need to panic

[nithin]

@SBpat

Can you @nithin please comment on this please. Also, regarding SLB and how it is going to work in the future when it may be implemented. I really would like to know your opinion on what I am thinking (my interpretation of this circular). How much right or wrong I am? Thank You

Had written this earlier

How does the new physical settlement of stock derivatives work?

Hi. How would this affect an option writer. Suppose I wrote out of the money options. How does it effect me if say My written options are expiring out of the money i.e. they become 0 on expiry and stock price OTM. My written option becomes ITM by closing and let’s say I cannot square it off due to illiquid bid offer and stock becomes in the money but well below my written price. Thanks in advance.

Here is one of the reasoning behind this SEBI move. Today if you are an operator with access to unlimited amounts of cash/stock, you can keep shorting/buying F&O contracts to move the stock in a particular direction without having to worry about placing a counter trade.

So assume a stock with lot size of 5000 is at Rs 100. An operator can keep selling futures/shorting calls to move the price down of this stock. On the expiry day, since everything is cash settled, he doesn’t have to worry about buying it back. Essentially making it very easy to manipulate the price. But going forward on these 46 scrips and soon on all F&O stocks, the operator will have to cover his positions or give/take delivery by putting full money. I think it will become extremely tough for people trying to manipulate stock prices in such F&O scrips.

I think in the long run this is good, but it is going to be a pain in the short term until all processes fall into play. Stock lending and borrowing today isn’t really easy for people to participate in, so that has to be first sorted.