For the physical settlement of options, there is one more new facility given by exchange wherein the investor can opt for the 'Do-not-exercise' option via the clearing member for Close to money CTM strike prices. CTM strike prices are the ones that are closest to the settlement settlement and delivery option.
- Settlement and Delivery Instructions – Help Center
- Cash-Settled Options Definition
The exchange has defined specific criteria to identify CTM strike prices as per below: The first 3 ITM options strikes which are immediately below the final settlement price would be CTM for call options; and The first 3 ITM options strikes which are immediately above the final settlement price would be CTM for put options. The trading members are provided with a file of CTM contract details by the exchange on the expiry day which has to be provided back to the exchange conveying whether you want to opt for Do-not exercise or no.
Once the option for Do-not-exercise is opted for, the said ITM contract will not be counted for physical settlement and will be cash-settled.
OPTION SETTLEMENT SIMPLIFIED - HOW SETTLEMENT HAPPENS IN OPTIONS - CALL OPTION AND PUT OPTION -
However, if no response is given then automatically such contracts would lead to physical settlement. Along with stock, one also has to fulfill the fund obligation.
Delivery Margin on Physical Settlement
Let us understand how the fund obligation is arrived at. In the case of physical settlement of futures, the settlement would be at the futures final settlement and delivery option price i.
Delivery Margin on Physical Settlement The stocks that have been identified for physical settlement would attract the delivery margin as is currently being done in the Capital market segment.
These margins will be part of the initial margin that would be additionally collected by the clearing member. In case of long options put and callthe delivery margin would be levied 4 days before the expiry day i.
The delivery margin would be released once the physical settlement process is completed. Note: There would be no assignment margins for the assigned option stocks identified for physical settlement.
In case your securities obligation is at the receiving end, that means you would receive stock for which you would need to arrange for funds to pay to the exchange.
- A cash-settled option is a type of option for which actual physical delivery of the underlying asset or security is not required.
- By James Chen Updated Apr 21, Physical delivery is a term in an options or futures contract which requires the actual underlying asset to be delivered upon the specified delivery date, rather than being traded out with offsetting contracts.
- Physical Settlement in Equity Derivatives(Futures & Options)
In case your securities obligation stands at the delivery position, you would need to arrange for stock in your demat account for pay-in, for which you would receive funds from the exchange.
All the above settlement with exchange happens through the clearing member, thus the funds and securities should be made available to the clearing member well before the below cut off times specified by the exchange to meet the obligation.
Computation of Settlement Obligation
Physical Settlement Cut-off Time Securities should be made available to clearing member by 2. The benefit of availing early pay-in facility gives early relief from the delivery margin.
Hence one must understand the physical settlement process well. Physical Settlement Penalty.