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

You must give or take delivery of the underlying stock if you hold an In The Money (ITM) stock option or a futures contract upon expiry². All stock F&O contracts traded on Indian exchanges require compulsory delivery. Out of The Money (OTM) stock options expire worthless and do not impose any delivery obligation⁸. Index F&O contracts are cash-settled.

The table below shows delivery obligations for stock F&O contracts post-expiry:

You need either full cash or stocks in your Zerodha account post-expiry to take or give delivery of the entire contract value worth of stocks. This increases your risk, so the margin required to hold these contracts goes up as expiry approaches. Our policy details how margins change and the action we take when you do not have full margins or stock.

Futures and Short Option (Calls & Puts) positions.

Your 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).

You will see the additional margin increase reflected in the Exposure margin field on the Kite funds page. You can check this increased margin requirement on the expiry day on Zerodha's margin calculator and on the order window.

Long/Buy option⁶ (Calls & Puts) positions.

When you pay a small premium of the contract value to buy stock options, you may have to take or deliver stocks worth the entire contract value after the expiration date. Your risk of defaulting goes up significantly. Exchanges therefore start asking for physical delivery margins from 4 days before 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 the table below explains. These margins only apply to ITM contracts. The delivery margin also applies if an OTM position becomes ITM. You will see the delivery margin reflected on the funds page on Kite.

Our margin policy

You can face margin penalties if you hold positions without the exchange-stipulated physical delivery margin (including long options).³

Upon physical delivery, 100% of the contract value will be debited from your account, and the shares will appear under T1. You must transfer additional funds if you have a shortfall in your account with open F&O contracts; otherwise, Zerodha will square off the positions. Proceeds from selling T1 holdings are not considered for this margin shortfall.

Stock receivable positions (Take delivery)

Your account will go into debit if you hold a "take delivery" position post-expiry without sufficient funds in your trading account. You will be charged 0.05% interest on the debit balance. This also means Zerodha's RMS team may sell the stock to make good the debit balance in your account.

If you take physical delivery of the stocks as a non-DDPI or POA client but do not have sufficient funds in your Zerodha account, a pledge with a specific time limit is created in favour of the stockbroker via the Clients Unpaid Securities Pledgee Account (CUSPA). You will then be notified by email to deposit funds into your Zerodha account or sell your stocks to meet your debit obligations. The stock will be sold to cover the outstanding debit balance if you fail to meet your debit obligations.

Stock deliverable positions (Give delivery)⁷

When you hold short futures, short calls, and long puts where you must give delivery of the stock post-expiry, the stock available in your demat account is debited towards meeting exchange obligations, including pledged holdings. If the stock is not present in your demat account on the expiry day, you have 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 aligns with regulatory requirements (WEB), as obligations for the physical settlement of the F&O segment at a specific expiry offset against obligations in the capital market segment on the corresponding trading date.

If you are a non-DDPI or POA account holder and fail to authorise the sale of securities for a physically settled F&O position, the shares are temporarily blocked and may not display in your Kite holdings. The shares will be unblocked post-market hours on Expiry + 1 day.

You will face short delivery and auction penalty if stock is not available in your demat account. You can still buy the stocks in the post-market session to avoid the auction penalty.

You must have stocks in your demat account on the expiry day for all "give delivery" positions.⁴ If any OTM position turns ITM, leading to a "give delivery" position post-expiry without sufficient stocks in your demat, you will face short delivery and auction penalties.

Spread and covered contracts

Give and take delivery positions are netted off if you hold multiple F&O positions in the same stock and your overall position in the account results in an equal quantity of both¹. 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 your net delivery obligation could be zero because of the various opposing F&O positions in the same stock, 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 charged separately for both the futures and call contracts. The delivery margin exists because you can exit one of the positions, which can, in turn, lead to a delivery obligation.

Stocks undergoing merger or demerger

In corporate actions such as a scheme of amalgamation (merger) or scheme of arrangement (demerger), exchanges force-close stock F&O contracts across different expiries and physically settle them on a single specified expiry date. As a result of this revised expiry date, these contracts are subject to margin requirements for physical delivery as mentioned below:

Buy/Sell price of the physically settled stocks

The expiry day is considered as the trade day for all stocks that get credited or debited due to physical delivery of F&O. 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: The settlement price of the futures contract is used as the exit price for all positions that you hold till expiry.
• Options: Exchanges exercise all ITM stock options that you hold till the expiry. The exit price of 0 is used for the P&L, as the stock delivery happens at the strike price.

Shares that are physically settled may display an incorrect P&L or show as N/A on T+1 day. In such cases, the discrepancy will automatically resolve within 48 hours, after which the correct P&L will be reflected.

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.

⁵ 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 Monday and Tuesday 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.

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