As per a SEBI mandate, physical settlement is compulsory if a trader holds a position in any Stock F&O contracts on expiry date.
What is Physical Settlement?
In a Stock F&O contract, when there is an open position that has not been squared off by its expiry date, Physical Settlement takes place. This implies they have to physically give/take delivery of Stocks to settle the open transactions instead of settling them with cash..
Examples of physical settlement:
Futures
Long positions of 1 lot of Reliance, 250 quantity at Rs. 2000 i.e. Rs. 5 lakh contract value
F&O = 20% charges i.e. Rs. 1,00,000. This means, you are required to give Rs. 1 lakh, but if you decide to physically settle then you need to have a complete contract value of Rs. 5 lakhs.
Short positions of 1 lot Reliance 250 quantity at Rs. 2000 i.e. Rs. 5 lakh contract value
F&O = 20% charges i.e. Rs. 1,00,000. This means, you are required to give Rs. 1 lakh, but if you decide to physically settle then you need to have the holdings of 250 quantity of Reliance and Rs. 1 lakh margin money till expiry date.
Options
Long - 1 lot of Reliance, 250 quantity for strike price of Rs. 2000 Call (CE) Options.
If the underlying price of Reliance is greater than the strike price of Rs. 2000, then the contract is said to be ITM (In-The-Money). If you wish to go for physical settlement, you need to maintain a free ledger balance of Rs 5 Lakh in your account, else physical settlement would not be done.
Long - 1 lot of Reliance, 250 quantity for Strike price of Rs. 2000 Put (PE) Options.
If the underlying price of Reliance is lesser than strike price of Rs. 2000, then the contract is said to be ITM (In-The-Money). If you wish to go for physical settlement, you need to provide the Stocks (shares) equal to the lot quantity positioned to be available in Demat account, else physical settlement would not be done.
Please note --
- Short ITM PE options, treatment would be similar to Long ITM CE options.
Free ledger balance equal to the contract value to be maintained. - Short ITM CE options, treatment would be similar to Long ITM PE options.
Holdings shares of lot quantity positioned to be available in Demat account.
What is the process for Physical Settlement on Upstox?
To opt for physical settlement on Upstox, you need to provide your consent first and here are the details for the same:
- To provide your consent for physical settlement of open Stock F&O contract(s) with September 2022 expiry visit the ‘Profile’ section on your Upstox account on our App / Web and give your consent from here before EOD on Tuesday, 27th September 2022.
- Based on your consent, Upstox will evaluate whether your position qualifies for physical settlements and if there is sufficient ledger balances / holdings (whichever applicable) is available.
- Kindly, plan your trades keeping in mind that you will not be able to trade in fresh positions in the current September 2022 expiry F&O contracts from Wednesday, 28th September 2022 onwards.
- Correspondingly, position conversion(s) on carry forward of any stock futures positions shall also not be permitted.
What other impact could this have on your positions?
Your position will automatically be squared-off on expiry day at 12:00 PM in case:
- You have not provided your consent for physical settlement
- You provided your consent for physical settlement and do not have Ledger Value (equal to contract value) / holdings available for the physical settlement of your positions.
- In a case of funds / holdings not being available for all the open positions, we will execute square offs for all the positions. Thus no partial funds / holdings evaluation for the expiring positions will be considered by our team.
What else to keep in mind?
Delivery margins would be applicable as per Exchange norms on all the existing long ITM (In The Money) stock option positions in a staggered manner as explained below:
- 10% of delivery margins computed on expiry -4 days EOD (Friday)
- 25% of delivery margins computed on expiry -3 days EOD (Monday)
- 45% of delivery margins computed on expiry -2 days EOD (Tuesday)*
- 70% of delivery margins computed on expiry -1 day EOD (Wednesday)*
- To avoid margin shortages, Upstox would be blocking such (above mentioned) delivery margins from Beginning of the Day (BOD) instead of End of the Day (EOD).
- If the positions are not squared off for any reason (e.g: non-liquidity), then the contract would have to be settled physically and you would be liable to pay the entire amount of the settlement.
* If you have opted for physical settlement, you would be required to fulfil the entire funds (contract value) / holdings requirement by EOD on Tuesday, 27th September 2022.
In case of spread contracts, you are advised to provide margins for both the legs since the risk of one leg square off by you anytime would result in physical settlement of the other leg.
Brokerage in Physical settlement:
Since there is a substantial increase in effort and risk to settle these F&O positions resulting in physical delivery, if F&O positions result in physical delivery brokerage will be 0.25% of the physical settled value. For all the netted off positions brokerage will be 0.1% of the physical settled value. All physical settled contracts (Futures & Options) will also carry an applicable Exchange charge.
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