Derivative Positions : Physically Settled from Oct 2019!


Life has changed from then – Of the 161 stocks traded in the futures and options segment, the physical settlement mechanism already existed for 116 stocks and from Sept. 27, or the start of October series, 45 stocks—highly liquid and most traded in the F&O segment—will also be delivered physically at the end of expiry (unless squared off or rolled over pre market ending).

We had earlier covered Physical Settlement of derivatives  in a blog note (

According to SEBI, the move is to check excessive speculation and volatility in share prices, especially during the settlement weeks.

Revisiting Basics

In the earlier system of cash settlement in futures & options, the seller of the financial instrument did not deliver the actual (physical) underlying asset upon expiration or exercise, but instead pocketed the losses or gains.

Now, when such contracts require physical settlement, traders are expected to roll over positions ahead of the expiry or be subject to taking delivery/giving delivery. That is, On the day of expiry, for a futures contract and or for an ITM options contract, the delivery of the actual underlying share is transferred to the client’s demat account on T+2 days for a buy side transaction. The shares are debited from the demat account in case of a short position.

In the absence of such delivery being available on T+2, on T+3 the exchange shall conduct an auction which will result in a heavy penalty!

Additional Margins

To prevent last minute defaults, the exchange has also introduced phased margining on open positions starting 4 days prior to actual expiry- staggered from 20% of delivery margin to 100% by expiry day .

Note that you need  to carefully monitor your margins to avoid shortfall penalties as well as interest being levied on the shortfalls or risk of being squared up by risk management teams. The margins will be levied under existing terms like span, exposure, premium etc so will be  difficult to distinguish!

In the event that you do not fulfill these margin obligations on time, your positions are liable to be squared off. Any loss arising out of such square off would be the sole responsibility of the client.

Physical Settlement and Risks

At PLPL, on expiry day, our RMS team may square off all open positions at some stage (Please await our internal circular), so it doesn’t qualify for a physical settlement.

Positions may also be denied for same day expiry so please plan your trades carefully or trade in next month contracts. For any reason which our RMS team is not able to square-off a margin shortfall position(s) and leads to compulsory physical delivery, the costs and risks of physical delivery will be applicable to the client.

Not squaring  off the positions would mean a delivery obligation where the deliverable quantity is computed as under:

Unexpired Futures

  • Long futures shall result in a buy (security receivable) position
  • Short futures shall result in a sell (security deliverable) position

In-the-money call options

  • Long call exercised shall result in a buy (security receivable) position
  • Short call assigned shall result in a sell (security deliverable) position

In-the-money put options

  • Long put exercised shall result in a sell (security deliverable) position
  • Short put assigned shall result in a buy (security receivable) position

The quantity to be delivered/received shall be equivalent to the market lot * the number of contracts that result in a delivery settlement.

You are required to bring in funds if your account results in a debit balance after physical delivery failing which the delivered shares will be liquidated to make good of the debit balance. Interest will be charged at 18% per annum at PLPL on the debit balance in the account. Additionally, any losses or penalties arising from the entire settlement process would be borne by the client entirely.

Finally, the Sun  may shine on SLB

An alternative to derivative shorts is the securities lending and borrowing mechanism—introduced in 2008—where traders can borrow shares for a fee. Globally, short positions in individual stocks are usually done through securities lending and borrowing, while derivative products are mostly used for indices.

Typically, large investors or institutions—mutual funds and insurers—are involved in lending of shares. But in India, this mechanism hasn’t evolved despite the market regulator’s emphasis. While India has the most active trading volume for single stock futures, securities lending in retail is yet to take off and this may just be the trigger the product wanted. PLPL has been one of the pioneering brokers in this field and clients can mail us at for more information on  this. Read more at

Existing PL Partners and Clients are requested to await circular in  this regard and remain in touch with for more information.


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