Devolvement is the automatic conversion of your In the Money (ITM) commodity option contracts into futures contracts of the same underlying asset at expiry. When your commodity options expire ITM, they devolve into the current available underlying futures contract. Out of the Money (OTM) options expire worthless.
How devolvement works
Your ITM option position converts to a futures position as follows:
- Call option (CE) long: Futures long
- Call option (CE) short: Futures short
- Put option (PE) long: Futures short
- Put option (PE) short: Futures long
The exchange sets your buy average for the devolved futures contract at the settlement price. You receive a cash settlement for the difference between the strike price and settlement price on the option expiry day.
Example scenario
Precious metals
Scenario: GoldM trading at ₹98,000
- You hold GoldM 25JUL 97000 CE (ITM option contract)
- On expiry day, your GoldM 25JUL 97000 CE devolves into GOLD 25JUL FUT with a buy average of ₹98,000
- You receive cash settlement of ₹98,000 - ₹97,000 = ₹1,000 on the option expiry day
Note: If the current month futures contract is unavailable, your option devolves into the next available month. In the above example, if GOLDM 25JUL FUT is not available, your option devolves into GOLDM 25AUG FUT.
Gold, Silver, and SilverM contracts are not monthly contracts, but they have monthly option contracts. This creates scenarios where two monthly options devolve to the same underlying futures contracts. For instance, both the Gold October option and Gold November option devolve into the Gold December futures contract.
Energy contracts
Scenario: Crude oil trading at ₹5,700
- You hold Crude 25JUL 5600 CE (ITM option contract)
- On expiry day, your Crude 25JUL 5600 CE devolves into Crude 25JUL FUT with a buy average of ₹5,700
- You receive cash settlement of ₹5,700 - ₹5,600 = ₹100 on the option expiry day
CTT charges on devolvement
You pay 0.01% CTT (Commodities Transaction Tax) on devolved futures short contracts. The calculation is: settlement price × number of lots × lot size × 0.01%.
Examples (assuming crude oil settlement price of ₹5,700):
| Your ITM positions on expiry | Next day futures quantity | CTT applicable |
|---|---|---|
|
CRUDEOIL25OCT6000PE
CRUDEOIL25OCTFUT 1 |
0 (net off) | Yes (PE long devolves to short futures) |
|
CRUDEOIL25OCT5500CE
CRUDEOIL25OCTFUT -1 |
0 (net off) | No |
| CRUDEOIL25OCT5500CE -1 | -1 | Yes |
| CRUDEOIL25OCT6000PE -1 | 1 | No |
Margin requirements for devolvement
The exchange blocks margins for your ITM options before expiry:
- 2 days before expiry: 25% of the futures margin
- 1 day before expiry: 50% of the futures margin
- On expiry day: 100% of the futures margin
If you close your ITM position before expiry (for example, on Monday when Wednesday is expiry), the devolvement margin blocks on Monday's ledger and unblocks on Tuesday after the ledger updates.
Short position settlement
Your short position settles based on whether the buyer exercises their option. If the buyer opts for DNE (Do Not Exercise), your ITM short position will not devolve into a futures position, and it will be cash settled instead.
What is DNE (Do Not Exercise)?
DNE applies when you hold an ITM long position but lack 100% of the futures margin required for devolvement. Your broker will typically close your long position before expiry.
If your broker cannot close your long option position due to illiquidity or other reasons, they can mark it as DNE. This prevents your option from devolving into futures.
The exchange provides a DNE window until 15 minutes after market close on the option expiry day.
Zerodha's devolvement process
Position restrictions on expiry day
- You cannot open fresh NRML positions on expiry day
- You can open fresh MIS positions only in crude oil and natural gas variants
- You can convert NRML positions to MIS, but not MIS to NRML
Notification and position square-off
Before 1 PM on expiry day, you will receive this notification via SMS and in-app nudges:
"Your [contract_name] option contract expires today & may devolve into a futures contract if it is in the money at expiry. Maintain adequate margins for the futures contract before 7 PM today to avoid square-off. Check the Zerodha Margin calculator for margin requirements. -ZERODHA"
How Zerodha squares off positions
After 7 PM on expiry day, Zerodha manually squares off positions based on these criteria:
- Short option positions only: Zerodha does not square off, as your SPAN and exposure margins already cover the resulting futures positions.
- Long and short positions: Zerodha checks your net futures position after devolvement. If you have sufficient margin for the equivalent futures positions, no positions are squared off. If you lack sufficient funds, Zerodha squares off your option positions.
- Risk management measure: Zerodha reduces not only ITM options but also Close to the Money (CTM) option strikes.
MIS positions and DNE
Zerodha's auto square-off system closes all MIS positions 10 minutes before market close. However, illiquid OTM strikes may not get squared off.
For crude oil and natural gas MIS positions:
- Zerodha filters out ITM MIS positions that were not squared off
- Manual attempts are made to square off these positions
-
If illiquidity prevents square-off, Zerodha opts for DNE for those clients