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What is Physical Delivery of Stock Options?

21 Jan 2022 0 COMMENT

As per SEBI circular, starting October 2019, it was mandatory for all Stock F&O contracts to be physically settled. Before October 2019 all contracts held till expiry used to be settled in cash.

So, what’s Physical Settlement?

If a trader has an open position in Futures contract & in the Money Options that has not been squared off on expiry date, contract get physically settled. The trader gives or receives delivery of the Stocks to settle the open transactions instead of the cash settlement of the transaction as earlier. Index based F&O contracts continue to be settled in cash whereas all Stocks in F&O contracts are settled physically.

What is margin required for opting physical settlement for Futures?

If trader decides to go for a physical settlement in the Futures, in case of long futures he needs to bring cash equivalent to contract value (Open quantity* Futures price) to take delivery of shares & in short futures he needs to ensure that sufficient free share is 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 TCS futures 150 quantity at 4000 so contract value becomes Rs.6 lakhs. You need to pay an initial margin of Rs.1,20,000 or assuming 20% SPAN +ELM of contract value to create an open position. If you decide to go for a physical settlement, then you need to bring in remaining cash equivalent to the contract value of Rs. 6 lakhs to take delivery of 150 shares.

If you have short positions in 1 lot TCS 150 quantity at 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. If you decide to go for a physical settlement, then you need to free the balance of 150 shares in demat account to give delivery of 150 shares.

What is the Margin Requirement for opting physical settlement in Stocks Options?

On Friday i.e. on E-4 day (i.e. 4 days before Expiry) one needs 10 % of VaR + ELM +Adhoc margins on contract value as margin. On Monday i.e. E-3 day, one needs to have 25 % of VaR + ELM +Adhoc margins on contract value as Margin. On Tuesday (E-2 day) one needs to have a margin of 45 % of VaR + ELM +Adhoc margins on contract value. On Wednesday (E-1 day) one needs to have a margin of 70 % of VaR + ELM +Adhoc margins on contract value. On Thursday i.e. on final expiry day (E) client should have 100% of VaR + ELM +Adhoc margins on contract value as Margin in their F&O allocation. If requested for physical delivery before 1 PM one needs to bring remaining margin equal to contract value or free share 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 intend to go for physical settlement, client needs to ensure sufficient free shares or margin in their trading account.

Example: - For short call & short put

If you have a short call 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 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 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 just 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

  • 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.

What if position couldn’t be 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 or exercise  to you.

If you are holding long call options and it expires the In-the-money (ITM), the contract will be exercise 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.

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