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Expiry Day / Physical Settlement in Equity

Modified on: Tue, 6 Sep, 2022 at 1:10 PM

All stock F&O contracts on Indian exchanges are compulsory delivery. So if you hold any stock future contract or any stock option contract which is In The Money (ITM) post expiry, you will be required to give or take delivery of the underlying stock. All out of the money(OTM) stock options are worthless on expiry and don’t result in any delivery obligation. All index F&O contracts are cash-settled.

The table below illustrates delivery obligations for stock F&O contracts post expiry.

 

Type

Security receivable

Security deliverable

Futures

Long futures

Short futures

Call options

Long ITM Call

Short ITM Call

Put options

Short ITM Put

Long ITM put

 

Taking or giving delivery of the entire contract value worth of stocks require either full cash or stocks in your account post expiry. This increases the risk and hence the margin required to hold these contracts go up as we get closer to expiry. Find below our policy on physically settled stock F&O contracts that has details on how the margins change and the action we take in the absence of full margins or stock.

 

Futures and Short Option (Calls & Puts) positions.

The margin requirement for all stock Futures and short options contracts increases on the expiry day to 40% of the contract value or SPAN + Exposure (whichever is higher). For example, if the SPAN + Exposure margin required for Reliance Industries futures is 25%, it will be 40% of the contract value on the expiry day.
  

Long/Buy option (Calls & Puts) positions.

While you pay only a small premium of the contract value to buy stock options, post expiry this can lead you to take or give delivery of stocks worth the entire contract value. The risk of an option buyer defaulting goes up significantly and hence exchanges start asking for physical delivery margins from 4 days before the expiry which keeps increasing as the contract gets closer to expiry. This margin is a percentage of the exchange risk margins (VaR+ELM+Adhoc) as explained in the table below. These margins are only applicable for In the money (ITM) contracts. The delivery margin is also applied if an Out of the money (OTM) position becomes ITM. 

 

Our margin policy

 

Day (BOD-Beginning of the day)

Margins applicable

E-4 Day (Friday)

10% of VaR + ELM +Adhoc margins

E-3 Day (Monday)

25% of VaR + ELM +Adhoc margins

E-2 Day (Tuesday)

45% of VaR + ELM +Adhoc margins

E-1 Day (Wednesday)

50% of the contract value

Expiry Day (Thursday)

50% of the contract value

 

Holding positions without the exchange stipulated physical delivery margin (including long options) can lead to margin penalties. If you do not fulfill the margin obligations on time, your positions are liable to be squared off. Any loss arising out of such square off would be the client's sole responsibility. For any reason, our RMS team cannot square off a margin shortfall position(s) and this leads to compulsory physical delivery; the costs and risks of physical delivery will be applicable to the client.

 

Stock receivable positions (Take delivery)

Holding a “take delivery” position post expiry without sufficient funds in the trading account will lead to the account going to debit. An interest of 24% per annum is charged on the debit balance. This can also mean that the stock will be sold by our RMS team to make good of the debit balance in the account.

 

Stock deliverable positions (Give delivery)

In case of short futures, short calls, and long puts where you are required to give delivery of the stock post expiry, stock available in your demat account is debited towards meeting the exchange obligations. Non-availability of stock in the demat account will lead to short delivery and auction penalty. All give delivery positions require you to have stocks in your demat account in the expiry week. If any OTM position turns ITM leading to a give delivery position post expiry without sufficient stocks in demat, this will lead to short delivery and auction penalties.

 

Spread and covered contracts.

If you hold multiple F&O positions in the same stock and if the overall position in the account results in an equal quantity of both, give and take delivery, they are netted off. So for example an equal number of lots of long futures (take delivery) and short ITM calls (give delivery) on expiry will lead to no delivery obligations as both positions are netted off. While the net delivery obligation because of the various opposing F&O positions in the same stock could be zero, the delivery margins are still charged on each F&O position separately. So if you had an equal quantity of short futures and long calls, the delivery margin would be asked separately for both the futures and calls contracts. The delivery margin exists because you can exit one of the positions that can, in turn, lead to a delivery obligation.

 

Policy regarding Close to Money contracts (CTM)

Exchanges have defined Close to money (CTM) contracts which are a subset of ‘in the money (ITM)’ or contracts that expire with some intrinsic value.

  • For Call Options: 3 ITM options strikes immediately below the final settlement price shall be considered as CTM . If a stock X contract settles at 300 on expiry day, call options with strike 295, 290, and 285 will be marked as CTM contracts.
  • For Put Options – 3 ITM options strikes immediately above the final settlement price shall be considered as CTM . If a stock X contract settles at 300 on expiry day, call options with strike 305, 310, and 315 will be marked as CTM contracts.
  • Exchanges have provided an option to not exercise long CTM contracts. We will be using this option on expiry day where needed to prevent un-intended Physical delivery

 

Buy/Sell price of the physically settled stocks

For all stocks that get credited or debited due to physical delivery of F&O, the expiry day is considered as the trade date. The buying or selling price will be as shown below:

 

Futures : The settlement price of the futures contract on the expiry date.

 

Options : The strike price of the contract.


Notes:
  • A higher brokerage of 0.25% of the total value of physical delivery is charged due to the additional effort. For all netted-off positions (spread contracts, iron condor, etc.), the brokerage will be charged at 0.1% of the physically settled value.
  • All physically settled contracts like stock delivery trades will carry an STT levy of 0.1% of the contract value for both the buyer and the seller of the contract.
  • Interest will be charged at 24% per annum if your account results in a negative balance when the exchange stipulated delivery margins are applicable from 5 days before the expiry (including long ITM options positions)
  • Stocks delivered through physical delivery can be sold only after T+2 days from the expiry day when the stock is delivered to the demat. In case the counterparty defaults to give delivery, the credits of shares from physical delivery post-auction may take up to T+5 days.

 

What should be done to take Physical Delivery of Equity Futures or in the money Equity Options Positions ?

 

Firstly, you should hold a Demat Account with us. 


Secondly ensure that available margin in your account is equal to, or more than the total Contract Value of the positions held by you. 

 

Thirdly, send an email to support@tradeplusonline.com regarding your intention to take Physical Delivery atleast 2 hours prior to the close of the market on the Expiry day. If sufficient funds are available in your  account, our RMS team will convert the position intended for Physical Delivery to NRML from MIS Product. 

 

Special Note: 
1.As a process all your overnight positions in stock expiry contracts will be uploaded a MIS positions in the Trading System on the expiry day. The NRML product would be dis-abled for stock expiry contracts on expiry day.
2.The above increase in margins and the process would not apply to Index Futures and Options being Cash settled.
3.This policy may be changed at the discretion of the RMS team.

 

 


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