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

All stock F&O contracts on Indian exchanges are compulsory delivery⁶. So if you hold any stock future contract or any stock option contract which is In The Money (ITM) post expiry, you will be required to give or take delivery of the underlying stock². All out of the money(OTM) stock options are worthless on expiry and don’t result in any delivery obligation. All index F&O contracts 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 require either full cash or stocks in your account post expiry. This increases the risk and hence the margin required to hold these contracts go up as we get closer to expiry. Find below our policy on physically settled stock F&O contracts that has details on how the margins change and the action we take in the absence of full margins or stock.

Futures and Short Option (Calls & Puts) positions.

The margin requirement for all stock Futures and short options contracts increases on the expiry day to 40% of the contract value or SPAN + Exposure(whichever is higher).
The additional margin increase will reflect in the exposure margin field on the Kite funds page.
For example, if the SPAN + Exposure margin required for ICICI Bank futures is 25%, it will be 40% of the contract value on the expiry day.
This increased margin requirement on the expiry day is updated on our margin calculator and on the order window. See Margin calculator.

Long/Buy option (Calls & Puts) positions.

While you pay only a small premium of the contract value to buy stock options, post expiry this can lead you to take or give delivery of stocks worth the entire contract value. The risk of an option buyer defaulting goes up significantly, and 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 in 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) 50% 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 you do not fulfill the margin obligations on time, your positions are liable to be squared off. Any loss arising out of such square off would be the client's sole responsibility. For any reason, our RMS team cannot square off a margin shortfall position(s), and this leads to compulsory physical delivery; the costs and risks of physical delivery will be applicable to the client.

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 to 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)

In case of short futures, short calls, and long puts where you are required to give delivery of the stock post expiry, stock available in your demat account is debited towards meeting the exchange obligations. Non-availability of stock in the demat account will lead to short delivery and auction penalty.
All give delivery positions require you to have stocks in your demat account in the expiry week.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 you 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 because of the various opposing F&O positions in the same stock could be zero, the delivery margins are still charged on each F&O position separately. So if you 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 you can exit one of the positions that can, in turn, lead to a delivery obligation.

Policy regarding Close to Money contracts (CTM)

Exchanges have defined Close to money (CTM) contracts which are a subset of ‘in the money (ITM)’ or contracts that expire with some intrinsic value.

  • For Call Options: 3 ITM options strikes immediately below the final settlement price shall be considered as CTM . If Wipro contract settles at 243 on expiry day, call options with strike 230, 235, and 240 will be marked as CTM contracts.
  • For Put Options – 3 ITM options strikes immediately above the final settlement price shall be considered as CTM . If Wipro contract settles at 243 on expiry day, put options with strike 245, 250, and 255 will be marked as CTM contracts.

Exchanges have provided an option to not exercise long CTM contracts. We will be using this option on expiry day in case the cash balance and the intrinsic value of the option contract is less than 50% of the contract value.

Example Scenario

If Mr A is long 1 lot of WIPRO 240 CE and let it expire and the underlying i.e Wipro settles at ₹243, this contract will be a CTM contract. The intrinsic value of this contract will be 3 [243-240] x 3200(lot size) = ₹9600.

Post-market closing, Zerodha will check if the client’s free balance (Cash balance + Rs 9,600) > ₹3,84,000 ( 50% of the contract value for WIPRO contract). If client's balance is lesser than ₹3,84,000, this position will be marked as Do not exercise and the option contract will expire worthlessly. If the balance is more than 50% of the contract value, Zerodha will let the option be exercised, resulting in physical delivery. All costs arising out of such delivery obligations will be applied to the client’s account.

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 date. 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 your 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 only after T+2 days 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+5 days.

VaR +ELM +Adhoc (Exchange risk) margins - You can find the stock-wise margin percentages in this sheet.

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

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