Physical Delivery of F&O Stock Contracts

Until October 2019, all contracts held till expiry used to be cash settled. However, a SEBI circular in October 2019 made it mandatory for all Stock F&O contracts to be physically settled.

How does Physical settlement work?

In case a trader has an open position in a Stock Futures contract & In-The-Money Stock Options that has not been squared off on expiry date, these contracts would have to be physically settled. The trader thus gives or receives delivery of the stocks which were the underlying to settle the transaction. Index based F&O contracts continue to be settled in cash whereas all Stocks in F&O contracts are settled physically.

Margin requirement for physical settlement in Futures

In a situation that one chooses physical settlement in Futures, cash equivalent to contract value (Open quantity* Futures price) needs to be brought in to take delivery of shares when it is buying futures. While selling futures, one needs to ensure that sufficient free shares are available in their demat account before 11:00 am on the expiry day.

Example for futures: -

Future :

If you have a long positions in 1 lot (150 Qty) TCS futures at Rs.4000 so contract value becomes Rs.6 lakhs (Qty*Price). Thus, an initial margin of Rs.1,20,000 or assuming 20% SPAN + ELM of contract value is required to create an open position. When going for physical settlement, then remaining cash equivalent needs to be brought in beyond the margin deposited amount to Rs. 6 lakhs to take delivery of 150 shares.

When selling a Futures contract in TCS 1 lot (150 Qty) at Rs.4000, contract value becomes Rs. 6 lakhs. You have to pay an initial margin of 1,20,000 or assuming 20% SPAN +ELM of contract value to create an open position. Whilst going for physical settlement, then one needs to free the balance of 150 shares in their demat account of TCS to give delivery of 150 shares.

Margin Requirement for physical settlement in Stocks Options

Margin requirements in Stock Options work in a different manner from Futures contracts. This is because as the contracts move closer to expiry day, the margin requirements increase and they cannot be rolled over as in the case of Futures contracts.

Thursday is expiry day for Options contracts and on Friday i.e. on E-4 day (i.e. 4 days before Expiry) one needs 10 % margins of the contract value(Qty*Price) also known as VaR + ELM +Adhoc margins. On Monday i.e. E-3 day, one needs to have 25 % of margins, on Tuesday (E-2 day) requirement of 45 % margins and finally on Wednesday (E-1 day) one needs to have a margin of 70 %. On Thursday i.e. on final expiry day (E) client should have 100% of VaR + ELM +Adhoc margins on contract value in their F&O allocation. If the request for physical delivery is made between 9 am to 11 am on expiry day, one has to bring remaining margin equal to contract value or free shares in demat by 11 am. If physical delivery is not requested, all Long Stock Options at 12 PM and Short Stock Options positions at 2:30 PM. 

This has been illustrated below with examples. Assuming 20% VAR+ ELM+ Adhoc margins is required for TCS.

For short call & short put if client intends to go for physical settlement, client needs to ensure sufficient free shares or margin in their trading account. Example: If you have a short call options position in 1 lot TCS 4000 strike price - you have to pay an initial margin to create an open position. If you decide to go for a physical settlement, then you need sufficient free balance in your demat to give delivery of 150 shares.

If you have a short put options position in 1 lot TCS 4000 strike price with 150 quantities, you have to pay an initial margin to create an open position. If you decide to go for a physical settlement, then you need to keep the remaining margin on position equivalent to the contract value of Rs. 6 lakhs to take delivery of 150 shares.

What is the impact on spread positions in F&O?

ITM (In the money) spread positions will be netted off as the impact of take & give delivery is zero, where the spread ratio is 1:1.

When does ICICIdirect collect these Margins?

When you buy Options, you pay a premium. The additional margins during the 3 days are collected at 3:15 PM for Options contract which become In The Money(ITM) only. A day before expiry & on expiry day collection of the required margin on ITM option positions will run every hour. If sufficient margins are not there, such positions will be squared off by the system.

What happens on expiry day?

You can opt for one of the below 2 options –

• Rollover your position to next month’s contracts (for Futures contract only)
• Square off your open positions in near month contracts before expiry or till such time Isec runs the End of Settlement Square-off process for Options at 1:30 pm & Futures at 2:30 pm to close all open positions on best effort basis prior to Expiry.

• Positions in delivery stocks and if customer selects “Choose Non Delivery” then such positions will be squared off in the EOS process before the expiry of such contracts. All Long Stock Options at 12 PM and remaining F&O positions at 2:30 PM.

How do you opt for physical settlement in Futures & options?

To mark a position for physical delivery, you need to login to ICICIdirect.com, go to open position page from 9 am to 11 am,  and a link to ‘Choose Delivery’ will be available against each stock contract. Choose Physical Delivery.

Position not squared off on the expiry day?

If for some reason your position couldn’t be squared off due to lack of liquidity, then In-the-money (ITM) option contract will be assigned to you.

If you are holding long call options and it expires the In-the-money (ITM), the contract will be exercised to you and if you don’t have funds to buy the shares, ICICIdirect will be forced to buy the stock on your behalf and sell next day. The equivalent profit or loss along with statutory charges will be passed to your account.

If you are holding long put options and the contract expires in-the-money (ITM), you will have to have shares to give delivery. In case the shares are not there in your demat account, it will go for auction. ICICIdirect will attempt to arrange the stock from  If any profit, that also will be credited to your account.

Price at which F&O contracts will be delivery settled on the expiry day?

The delivery settlement obligation shall be computed at following prices

• Futures - Final Settlement price of the futures contract
• Options - Strike price of the respective option contract

All futures positions shall be first mark to market to final settlement price on the expiry day and the same shall be settled on T+1 day as currently being done.

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