From this series (October 2019), all stocks in the derivative segment will be physically settled. This means delivery of shares is a must, if one fails to square-off his or her position ahead of the expiry date.
While most stocks have already been moved into physical settlement category in the F&O, the last bunch of some 50 stocks including Bharti Airtel, Reliance Ind and SBI has been shifted now.
According to SEBI, the move is to check excessive speculation and volatility in share prices, especially during the settlement weeks.
Earlier, any open position in the F&O segment would automatically squared off by the exchanges at the close of the session with the final closing price as the settlement price. The difference between one’s position and the settlement price either gets debited or credited as the case may be into the client’s ledger. To avoid booking losses, some traders roll over their positions on the expiry date leading to excessive volatility.
So, will the ‘physically settled’ system make any difference?
If one goes by the current trend in the F&O segment on the stocks that are already in the physical settlement mode, there is hardly any change. Traders still roll over their positions well ahead of expiry or square off their positions on the advice of brokers.
However, things could change in the coming days, as the stocks that have been moved into physical delivery are highly liquid, large-caps with active trading interest. So, the traders have to be doubly cautious while trading in the F&O segment from now on, as they may end up paying the full contract value besides the margin money.
If you don’t square off your positions in the identified stocks before the close of trading hours on the expiry day, you will either have to take delivery (for long futures, long calls, short puts) or give delivery of the underlying stock (short futures, long puts, short calls) for the contract.
Currently 149 stocks are available for trading in the F&O segment on the NSE. The market lot varies for individual stocks from as high as 45,000 shares (GMR Infrastucture) to as low as 10 shares (MRF).
Assuming you are long on GMR Infrastructure futures, as the stock is quoting around ₹17, you need to have ₹7.65 lakh in your account on the expiry day to take delivery, if you do not square off your position explicitly. Similarly, the GMR Infrastructure 17 call is quoting at a premium of ₹1. Though it will cost you ₹45,000 to buy the option, you will need to shell out ₹7.65 lakh to take delivery of those shares when your positions is not closed by you ahead of the expiry. However, if the premium of the option rises at the time of expiry, your burden will be less to that extent.
For positions of short futures, long puts or short calls of GMR infrastructure, you need to own 45,000 shares in your account as you are liable to give delivery of shares to the counter-party when he/she exercises his/her right.
However, if you do not have enough shares in your account, then the settlement will go to auction, where you may be forced to buy those shares at an astronomical price.
In the case of MRF, where the market lot is 10, you need to have about ₹6.3 lakh, as the underlying share is quoting around ₹63,000.
Need for clear strategy
So, traders wishing to benefit from the leverage of F&O market should have a clear strategy before entering into any position. Besides, proper communication with your broker is also a must, especially during the expiry week.