Process for Physical Delivery in F&O

Margin Requirement for Physical Settlement

Margin requirement for physical settlement in Futures

In a situation that one chooses physical settlement in Futures, cash equivalent to contract value (Open quantity* Futures price) needs to be brought in to take delivery of shares when it is buying futures. While selling futures, one needs to ensure that sufficient free shares are available in their demat account before 11:00 am on the expiry day.

Example for futures: -

Future:

If you have a long position in 1 lot (150 Qty)  TCS futures  at Rs.4000 so contract value becomes Rs.6 lakhs (Qty*Price). Thus, an initial margin of Rs.1,20,000 or assuming 20% SPAN + ELM of contract value is required to create an open position. When going for physical settlement, then remaining cash equivalent needs to be brought in addition to the initial margin deposited amount to take delivery of 150 shares amounting to Rs 6 Lakhs.

When selling a Futures contract in TCS 1 lot (150 Qty) at Rs.4000, contract value becomes Rs. 6 lakhs. You have to pay an initial margin of 1,20,000 or assuming 20% SPAN +ELM of contract value to create an open position. Whilst going for physical settlement, then one needs to ensure free balance of 150 shares is available in their demat account of TCS to give delivery of 150 shares.

Margin Requirement for physical settlement in Stocks Options

Margin requirements in Stock Options work in a different manner from Futures contracts. This is because as the contracts move closer to expiry day, the margin requirements increase and they cannot be rolled over as in the case of Futures contracts.

For instances, On expiry day for Options contracts, there is a gradual increase in margin requirement. So, on E-4 day (i.e., 4 days before Expiry) one needs 10 % margins of the contract value (Qty*Price) also known as VaR + ELM +Adhoc margins. On E-3 day, one needs to have 25 % of margins, on E-2 day requirement of 45 % margins and finally on E-1 day one needs to have a margin of 70 %. On final expiry day (E) client should have 100% of VaR + ELM +Adhoc margins on contract value in their F&O allocation. If the request for Physical Settlement is made between 9 am to 11 am on expiry day, one has to bring in remaining margin equal to contract value or free shares in demat by 11 am. If physical delivery is not requested, all Long Stock Options at 12 PM and Short Stock Options positions at 2:30 PM will be squared off.

This has been illustrated below with examples. Assuming 20% VAR+ ELM+ Adhoc margins is required for TCS.

Long stock options which are near month ITM (in the money) & CTM (close the money) contracts i.e., within 5% of the spot price, will be applied physical delivery margins

e.g.: If spot price is Rs. 100 then 100-105 call options and 100-95 put options will be considered as CTM. As the spot price moves up or down, the CTM contract will change accordingly.

For short call & short put if client intends to go for physical settlement, client needs to ensure sufficient free shares or margin in their trading account.

Example: If you have a short call options position in 1 lot TCS 4000 strike price - you have to pay an initial margin to create an open position. If you decide to go for a physical settlement, then you need sufficient free balance in your demat to give delivery of 150 shares.

Short option positions that are 4 OTM strikes from prevailing SPOT price will be squared off by the system on or after 2:30 PM and the remaining contracts will get expired.

Example: - If the spot price is ₹100: - Call options from 101 to 104 will be squared off. - Put options from 99 to 96 will be squared off. As the spot price fluctuates, the relevant OTM contracts will adjust accordingly.

Impact on spread positions in F&O

ITM (In the money) spread positions will be netted off as the impact of take & give delivery is zero, where the spread ratio is 1:1.

Margin collection timings for long stock options

When you buy Options, you pay a premium. The additional margins during the 3 days are collected at 3:15 PM for Options contract which become In the Money (ITM) only. A day before expiry & on expiry day collection of the required margin on ITM option positions will run every hour. If sufficient margins are not there, such positions will be squared off by the system.