What is Zerodha's policy on the physical settlement of equity derivatives on expiry?
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What is Zerodha's policy on the physical settlement of equity derivatives on expiry?

All stock F&O contracts traded on Indian exchanges require compulsory delivery. If an individual holds an ITM stock option or a futures contract upon expiry, they must give or take delivery of the underlying stock². Conversely, OTM stock options are worthless upon expiry and do not impose any delivery obligation⁸. Index F&O contracts, on the other hand, are cash-settled.

The table below illustrates delivery obligations for stock F&O contracts post-expiry.


Security receivable Security deliverable
Futures Long futures Short futures
Call options Long ITM Call Short ITM Call
Put options Short ITM Put Long ITM put

Taking or giving delivery of the entire contract value worth of stocks requires either full cash or stocks in the Zerodha account post-expiry. This increases the risk; hence, the margin required to hold these contracts goes up as we get closer to expiry. According to regulations,  Find below our policy on physically settled stock F&O contracts that have details on how the margins change and the action we take in the absence of full margins or stock.

Did you know? If a force closure of any F&O contract occurs due to corporate actions like a merger or demerger, 100% margin will be required on the day when the F&O contract expires.

Futures and Short Option (Calls & Puts) positions.

The margin requirement for all stock futures and short options contracts increases on the expiry day to 50% of the contract value or 1.5 times NRML margin (whichever is lower).

The additional margin increase will be reflected in the Exposure margin field on the Kite funds page. This increased margin requirement on the expiry day is updated on Zerodha's margin calculator (WEB) and on the order window.

Long/Buy option⁶ (Calls & Puts) positions.

When clients pay a small premium of the contract value to buy stock options, they may have to take or deliver stocks worth the entire contract value after the expiration date. The risk of an option buyer defaulting goes up significantly. Hence, exchanges start asking for physical delivery margins from 4 days before the expiry, which keeps increasing as the contract gets closer to expiry. This margin is a percentage of the exchange risk margins(VaR+ELM +Adhoc)⁵, as explained in the table below. These margins are only applicable for In the money (ITM) contracts. The delivery margin is also applied if an Out of the money (OTM) position becomes ITM. The delivery margin will reflect on the funds page on Kite.

Our margin policy

Day (BOD-Beginning of the day) Margins applicable
E-4 Day (Friday) 10% of VaR + ELM +Adhoc margins
E-3 Day (Monday) 25% of VaR + ELM +Adhoc margins
E-2 Day (Tuesday) 45% of VaR + ELM +Adhoc margins
E-1 Day (Wednesday) 25% of the contract value
Expiry Day (Thursday) 50% of the contract value

Holding positions without the exchange stipulated physical delivery margin (including long options) can lead to margin penalties.³

If margin obligations are not met within the given timeframe, positions may be squared off. In such cases, any resulting losses from the square off will be the sole responsibility of the client. If, for any reason, Zerodha's RMS team is unable to square off a position due to margin shortfall, it may result in compulsory physical delivery. In such situations, the client will bear the costs and risks associated with the physical delivery.

Stock receivable positions (Take delivery)

Holding a “take delivery” position post expiry without sufficient funds in the trading account will lead to the account going in debit. An interest of 0.05% is charged on the debit balance. This can also mean that the stock will be sold by our RMS team to make good of the debit balance in the account.

Stock deliverable positions (Give delivery)⁷

In the case of short futures, short calls, and long puts where clients are required to give delivery of the stock post expiry, stock available in the demat account is debited towards meeting the exchange obligations including pledged holdings. If the stock is not present in the demat account on the expiry day, the client has the option to purchase the stock on the same day, and this purchase will be counted as part of the stock deliverable position to be netted off. This is in accordance with regulatory requirements (WEB), as obligations for the physical settlement of the F&O segment at a specific expiry are to be offset against obligations in the capital market segment on the corresponding trading date. If a non-DDPI/POA account holder fails to authorise the sale of securities for a physically settled F&O position, the shares are temporarily blocked and may not display in Kite holdings. The shares will be unblocked post market hours on Expiry + 1 day. To learn more, see Why did Zerodha send an email to authorise holdings?

Non-availability of stock in the demat account will lead to short delivery and auction penalty. To avoid the auction penalty, clients can still buy the stocks in the post-market session. To learn more about post-market session, see What are pre-market and post-market sessions and orders in NSE and BSE?

All give delivery positions require clients to have stocks in the demat account in the expiry day.⁴ If any OTM position turns ITM leading to a give delivery position post expiry without sufficient stocks in demat, this will lead to short delivery and auction penalties.

Spread and covered contracts.

If a client hold multiple F&O positions in the same stock and if the overall position in the account results in an equal quantity of both, give and take delivery, they are netted off¹. So for example an equal number of lots of long futures (take delivery) and short ITM calls (give delivery) on expiry will lead to no delivery obligations as both positions are netted off.

While the net delivery obligation could be zero because of the various opposing F&O positions in the same stock, the delivery margins are still charged on each F&O position separately. So if a client had an equal quantity of short futures and long calls, the delivery margin would be asked separately for both the futures and calls contracts. The delivery margin exists because a client can exit one of the positions which can, in turn, lead to a delivery obligation.

Buy/Sell price of the physically settled stocks

For all stocks that get credited or debited due to physical delivery of F&O, the expiry day is considered as the trade day. The buying or selling price will be as shown below:

Futures: The settlement price of the futures contract on the expiry date.

Options: The strike price of the contract.

F&O P&L for physically settled contracts

Futures: For all positions that are held till expiry, the settlement price of the futures contract is used as the exit price.

Options: All ITM stock options that are held till the expiry are exercised. The exit price used is 0 for the P&L, as the stock delivery happens at the strike price.

Notes

¹A higher brokerage of 0.25% of the total value of physical delivery is charged due to the additional effort. For all netted-off positions(spread contracts, iron condor, etc.), the brokerage will be charged at 0.1% of the physically settled value.

²All physically settled contracts, like stock delivery trades, will carry an STT levy of 0.1% of the contract value for both the buyer and the seller of the contract.

³Interest will be charged at 0.05% per day if Zerodha account results in a negative balance when the exchange stipulated delivery margins are applicable from 5 days before the expiry (including long ITM options positions)

⁴Stocks delivered through physical delivery can be sold on the T+1 day from the expiry day when the stock is delivered to the demat. In case the counterparty defaults to give delivery, the credits of shares from physical delivery post-auction may take up to T+2 days.

VaR +ELM +Adhoc (Exchange risk) margins - The stock-wise margin percentages can be found in this sheet.

⁶ New buy positions, i.e. fresh long positions, will be blocked on Wednesday and Thursday for OTM stock option contracts of the current month's expiry.

⁷ Depending on the liquidity, Zerodha might attempt to buy stocks during the post-market session to partially or fully net off the physical delivery obligation if the client's account doesn't have enough funds or securities.

⁸ Zerodha may square off OTM strikes that are closer to the Last Traded Price (LTP) as they may turn to ITM, resulting in physical delivery. Up to three OTM strikes from the LTP can be subject to square-off.

This policy may be changed at the discretion of the RMS team.