NSE Discontinues DNE Facility for Stock Options: How it Impacts on Traders

TL:DR

• The DNE or ‘Do Not Exercise’ facility available for stock options on expiry date will be discontinued with effect from March 2023 expiry. (NCL/CMPT/55330)
• With this facility, option traders could instruct the broker to not exercise the right to give or receive deliveries.
• The withdrawal of DNE will result in physical settlement of an option contract if it turns in-the-money (ITM) and has not been squared off on expiry day.

The National Stock Exchange (NSE) has announced it will discontinue the ‘Do Not Exercise’ (DNE) facility on stock options from March 2023 expiry. Let’s understand what this means and how it will impact F&O traders.

What is a DNE? 

The Do Not Exercise facility, allowed stock option traders to instruct the broker to not exercise their right as a buyer (holder) to take or give delivery.

How does DNE work? 

Say a stock option expires in-the-money (ITM), then the trader has to either give the delivery of shares or take the delivery of the shares. The ‘Do not Exercise’ facility enabled brokers (acting for clients) to ask the exchange not to exercise close to money option strikes and let the option expire worthless. Let’s understand this better with an example. 

Say shares of Reliance Industries are trading at ₹2,200 and a trader bought an out-of-the-money (OTM) call at 2,220 strike price. Now, at expiry, if the shares close at ₹2,221, the call option turns in-the-money (ITM) by ₹1. If the position is not closed, the broker, on behalf of the trader, could mark this contract as 'Do Not Exercise' (if need be). Thus, the exchange would then let the contract expire worthless.

Impact of DNE withdrawal

Without DNE, the following scenarios could play out: 

• You square-off the option before expiry

Here, you choose not to wait for the last moment on the expiry date and exit the position in advance to avoid any physical settlement. 

• You do not square-off the option before expiry

If you hold a call option, then you would have to physically take delivery of stocks to settle the open transaction. If you hold a put option, you would give delivery of stocks to settle the open transaction. This is in view of the physical settlement mechanism in F&O. In either case, inability to fulfil the obligation could lead to a penalty and/or losses. 

How to avoid penalty and/or losses in absence of DNE

• Before expiry, keep sufficient funds in your account, especially, if you hold a call option position.
• If you hold a put option, ensure you hold sufficient shares in your demat account to give delivery. 
• In case, you do not wish to take or give delivery, ensure your position is squared off before expiry. 

The DNE facility was first introduced (NSE/CMPT/35635) in 2017 , but was withdrawn (NCL/CMPT/49775) in 2021 . Following this, NSE had reinstated (NCL/CMPT/51971) DNE facility on 28 April 2022.