Updates on Physical Settlement in Futures & Options for February 2021
As per a SEBI mandate, physical settlement is compulsory if a trader holds a position in any of the stock F&O contracts on an expiry date.
What is physical settlement?
In an 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:
Long positions of 1 lot Reliance 250 qty at 2000 Rs. 5 lakh contract value
F&O = 20% charges 100,000 (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 qty at 2000 Rs. 5 lakh contract value
F&O = 20% charges 1,00,000 (You are required to give Rs. 1 lakh, but if you decide to physically settle then you need to have the holdings of 250 Qty of Reliance and Rs. 1 Lakh Margin money till expiry date.
Long - 1 lot of 250 qty for strike price of Rs. 2000 Call (CE) Options.
If the underlying price of Reliance is greater than strike price of 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 250 qty for Strike price of 2000 Put (PE) Options.
If the underlying price of Reliance is lesser than strike price of 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 shares equal to the lot qty 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 Qty positioned to be available in Demat account.
What are the details of the update on physical settlement?
To better plan your trading experience with Upstox, take note of some important updates on physical settlements of contracts with the expiry of February 2021.
- You can provide your consent for physical settlement of your Feb-2021 expiry open stock derivatives contract(s) before the end of the day on Tuesday 23rd February 2021 by visiting the ‘Profile’ section on your Upstox account.
- 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 current (25-Feb-2021) expiry F&O from Wednesday onwards.
- Correspondingly, position conversion(s) on carry forward of any stock futures positions shall also not be permitted.
What will be the impact of this update on your positions?
Your position will automatically be squared off 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 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 to keep in mind?
Delivery margins would be applicable as per exchange norms on all the existing long ITM (In The Money) stock option position 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)*
1. 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).
2. 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 Tuesday EOD.
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.
And that’s all. Keep a watchful eye on this page for more updates from Upstox!