loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

Physical Delivery of F&O Stock Contracts

12 Apr 2022 0 COMMENT

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 1:30 pm 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 by 1 PM, one has to bring remaining margin equal to contract value or free shares in demat. If physical delivery is not requested, the position will get squared off at 1:30 pm by the system. 

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

 

Day (BOD-Beginning of the day)

Margins applicable

Margin Required for TCS ITM 4000 CE for 150 Qty

Margin Required for TCS ITM 4000 PE for 150 Qty

E-4 Day i.e. Friday BOD

10% of VaR + ELM +Adhoc margins

12000

12000

E-3 Day i.e. Monday BOD

25% of VaR + ELM +Adhoc margins

30000

30000

E-2 Day i.e. Tuesday BOD

45% of VaR + ELM +Adhoc margins

54000

54000

E-1 Day i.e. Wednesday BOD

70% VaR + ELM +Adhoc margins

84000

84000

Expiry day i.e. Thursday BOD

100% VaR + ELM +Adhoc margins

120000

120000

 

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.

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 before 1 PM 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 Stock lending and borrowing scheme (SLBM market) and give delivery of shares on your behalf and then sell. The loss on such transaction difference between buy or sell will be debited to your account. 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.Customers will receive shares or funds in T+2 days.

Disclaimer - ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. I-Sec acts as a Composite Corporate agent having registration number - CA0113. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning, Investment Advisory etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.

One Click Portfolio, Premium Portfolio and Golden Stock Portfolio related services are offered under Research Analyst license of I-Sec. Any complaint / dispute pertaining to the same would not be entertained by Stock Exchanges.

Global Investment Platform is offered by ICICI Securities in collaboration with interactive brokers. Any complaint / dispute pertaining to the same would not be entertained by Stock Exchanges. Involvement of ICICI Securities Ltd. is restricted to Referral Only. ICICI Securities Ltd. does not offer this product directly to customers. Client’s details will be shared with third party stock broker (Interactive Brokers Group, Inc.) with expressed consent from clients. All dealings including KYC will be executed by third party stock broker(Interactive Brokers Group, Inc.) directly with client and ICICI Securities Ltd. will not incur any personal financial liability.

The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.