≡ Menu

How Nifty Options Settlement Is Done


This post discusses how Nifty Options settlement is done.

First thing you must know is that in India Nifty options are cash-settled. These are European-style settlements. A cash-settled option is a type of option for which actual physical delivery of the underlying asset or security is not required. The settlement results in a cash payment + brokerage and taxes, instead of settling in stocks, bonds, commodities or any other asset. In India, options are allowed for trading before expiration (American style). Which means a trader can buy/sell an option and finish the trade before expiry ant time he/she wants. However, in European style cash settlement, the option contract owner is required to hold until expiration.

Though stock options settlements in India is moving towards cash settlement before expiry, however, if held until expiry then physical delivery of the stock is required. Here is the news report that you can read:
https://www.livemint.com/Money/RfzIRyoFkf1lI6Ar7GpURO/Sebi-takes-aim-at-extremist-speculators-with-new-derivativ.html

Here is list of stocks in which physical delivery is required if options are taken to expiry:
https://www.nseindia.com/content/circulars/FAOP40257.pdf

And here is SEBI circular which explains that by October 2019 expiry ALL stocks where options are traded will be moved towards physical delivery of stocks:
https://www.sebi.gov.in/legal/circulars/dec-2018/physical-settlement-of-stock-derivatives_41482.html

American style settlement where the owner of the option has the right to exercise the option.

Thought introduced in a phased manner in April 2019, it is still not popular in India as Indian option trader rolls over the position but does not want to take delivery of shares.

But what happens in India if you fail to close the option trade and take it to expiry?

If the option you sold or bought expires worthless then there is nothing to be done. But if you bought an option and it ends in the money you will have to take the delivery of shares.

Here is small explanation of the meaning of exercising of options (not cash settlement):

Basically exercising means the right to buy or sell the stock at a certain price as defined in the options contract.

If the holder of a put option exercises the contract, then he will sell the underlying security at a stated price within a specific timeframe.

If the holder of a call option exercises the contract, then she will buy the underlying security at a stated price within a specific timeframe.

Before exercising an option, it is important to consider what type of option you have and whether you can exercise it. You should know the terms and conditions of trading options before you are trading them. If there is a confusion you can ask your broker.

Due to the above reason its HIGHLY RECOMMENDED that do not trade stock options. If you want to trade options then trade either Nifty or Banknifty options as neither Nifty nor Banknifty shares are traded in the market, so the question of settlement does not arise – they can be settled in cash only.

Here is what happens when an option is exercised:

A Put Option is a contract that gives its holder (the buyer) the right to sell a set number of equity shares at a set price, called the strike price, before a certain expiration date. However in India a stock option is exercised only on the expiry day

If the option is exercised, the writer of the option contract is obligated to purchase the shares from the option holder. “Exercising the option” means the buyer is opting to take advantage of the right to sell the shares at the strike price.

The opposite of a put option is a call option, which gives the contract holder the right to purchase a set amount of shares at the strike price prior to its expiration.

There are a number of ways to close out, or complete, the option trade depending on the circumstances.

If the option expires in the money, the option will be exercised. If the option expires out of the money, nothing happens, and the money paid for the option is lost.

Conclusion:

In India Index Options are cash-settled, which means you can buy/sell Nifty/Banknifty options anytime and close the trade anytime before expiry. Net result will be cash-settled. If you make a profit, your account will be credited with the profit money minus the brokerages. If you make a loss, the broker will deduct the loss plus brokerage from the money blocked from the margin to trade and release the rest of the money back to your account.

Here is an example.

Assuming Trader A buys a Nifty call option strike 11500 at 55. And margin blocked was 75 (lot size) * 55 = 4125.

He sells it at 70. So 75 (lot size) * 70 = 5250.

Profit made: 5250-4125 = 1125.

Assuming brokerage + taxes was 50 in this full transaction.

So the broker will release 4125 (initial margin blocked) + 1125 (profit) – 50 (brokerage + tax) = 5200 back to Trader A’s account.

This is cash-settlement. You can see that no change of stocks took place in this transaction, only cash exchanged hands.

Now suppose Trader A had sold that option at 40 then what would have happened?

75*40 = 3000

Loss made:

3000-4125 = -1125.

So the broker will release 4125 (initial margin blocked) – 1125 (loss) – 50 (brokerage + tax) = 2950 back to Trader A’s account.

As you can see whether profit or loss the option trade was cash-settled – there was no exchange of stocks.

However when you do stock option trade in India, after October 2019 there is almost a certainty that 100% of stock options will be exercised if in the money and you may have to either buy the stock in cash equal to number of lots traded or have to produce that many stocks from your account.

So if you trade stock options make sure to close the trade before expiry and NEVER let the stock option get in the money and be exercised.

Hope the above articles helped.

Please like & share my blog with your friends:

Hi, I am Dilip Shaw, owner of this website. I am a trader like you. I have been trading since 2007, but lost a lot of money till 2010. I then stopped trading and studied options like college exams. Started trading again from 2011 and never looked back since. I did a lot of research, read books and did countless paper-trading before being profitable. You can read about me here.

My conservative trading course since 2014 is helping many retail traders just like you who have a job or business make consistent profits like this:

What Traders Say About This Course
Testimonials Year 2015
Testimonials Year 2015 Page 2
Testimonials Year 2015 & 2016
Testimonials Year 2016
Testimonials Year 2017
Testimonials Year 2018
Testimonials Year 2019
Testimonials Year 2020 to 2023
What People Say Just After Reading My Course
Emotional Testimonial by a Young Woman Trader and Her Mother
One Of My Client Is Making Rs.25k Per Week
Difference Between Other Courses And Mine
What Others Charge for Courses

You can do this course from your home. Some traders make amazing profits like Rs. 16.26 lakhs profit in 5 days though results may differ for all.

This course helps you learn to trade conservative option strategies for monthly income. Once you finish the course you can start trading immediately. You can start trading from any day. No need to wait for expiry. You will make profits consistently.

This course is good if you have a regular job or business. You DO NOT NEED to monitor your trades every second.

What You Get?

Before reading please understand that for all 5 strategies, strike selection will be taught. Strike selection while trading Options is the most essential part to succeed.

You get two conservative non-directional strategies on options, one conservative stock option strategy and two conservative directional strategies on Future & Option combination.

Non directional trades are profitable 80% of the times and make 3-5% per trade (Results may vary).

Directional strategy makes money fast. It does not matter which side the stock moves. In fact you make more when you are wrong in the Future trade. 🙂 Some amazing profits possible here.

The stock option trade makes 30,000 in one trade and if SL is hit there is a way to recover losses plus make 30k in that trade.

Technical knowledge is NOT required. No need to monitor trades every second.

In the course you will learn how to select the strike prices. You learn when to trade, which strikes to sell which to buy, how much profit target you should be looking for, the best place to take stop loss and what to do after taking stop loss – means how to get that money back. The success rate is more than 80%.

Since trades are properly hedged there is no stress in trading my strategies.

I am very confident that you will make money trading my strategies. To help you succeed I offer few months support for FREE.

11 Reasons Why You Should Do The Course:
1. TA Knowledge NOT required
2. NO Software Required
3. Regular Monitoring NOT Required
4. Continue with Your Job
5. Do Course From Your Home
6. 100% Hedged
7. Stress-Free Trading
8. Not too much money needed to trade
9. Scaling Possible
10. One Time Fee
11. FREE Support For Months
To know more Call/SMS/WhatsApp me on 9051143004 or email me now. I know English and Hindi.

Read the details of the course here.

If you want to enroll for the course you can do so here.

P.S: So many years of trading has thought me one thing - it is always better to make small profits month after month, rather than lose money month after month trying to make too much money. It never happens. But small money accumulated month after month can become very big in only a few years.

Privacy Policy | Disclaimer

WhatsApp or Call me: 9051143004

If you have any question you can contact me.

You can read about me here and my trading mistakes here.

TheOptionCourse.com Copyright @ All Rights Reserved
Dilip Shaw, Founder

Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.

INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.

DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. In other words I am a sub-broker. I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other forms of social media. I strictly adhere to laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles in this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given in this website. I am not responsible for any investment decision you take after reading any article in this website. Click here to read the disclaimer in full.

Some Basic Rules To Trade Options For Beginners
Tips On Selling Put Option

About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 6 comments… add one }
  • tg July 26, 2020, 6:24 pm

    hi,
    i have one que,

    what happens if i sell deep itm call and unable to find buyer to buy it back on expiry day.

    ex nifty at 11200 and i sold 10700 call at 540.

    and nifty expired at 11200 but i unable to close my position. for any reason. than

    how settlement will be done of this open position?

    • Dilip Shaw July 27, 2020, 1:41 pm

      Usually it will not happen as for every seller there has to be a buyer. Let’s suppose there were only 10 trades left on expiry day – means 10 buyers and 10 sellers. No one is well or due to lack of internet or other issues were not able to log in that day.

      In that case the RM (Risk Management) team will start closing all that trades that were not closed by 3.15 pm. This is usually done by software at market prices. Almost all brokers start closing the open contracts at 3.15 pm on expiry days. So even if someone delays the start still since for every seller there is a buyer – at some time before closing bell all options will be closed.

      However the above is rule for index options only. For stocks options you will have to buy shares or sell shares equivalent to that of the lot size on the expiry day if not closed.
      But as a trader it’s your job to close the options and futures before the automation to close derivatives start – otherwise you may end up in deep trouble.
      Read this article to know why:
      https://www.theoptioncourse.com/close-futures-and-options-before-expiry-day-to-save-securities-transaction-tax-stt/

      • tg July 30, 2020, 4:45 pm

        what if there is a huge difference between the market price of option and strike price at after 3.15 pm…

        see, today market expired at 11102,
        but the price of 11950put it 745 (check this screenshot taken at 4:40pm after closing of market: prnt[dot]sc/tr45au)
        whereas it supposed to be 11102-11950 = 848.

        Now, what if I sold it at 1000, so will it be settled at 848 or 745(market price)…

        So, what will be my profit 1000-848 = 152 ?
        or
        if broker squared off at market price which 1000-745 = 255 ?

        and one more question, what does “-” at LTP mean at nse website. (prnt[dot]sc/tr487r)

        • Dilip Shaw July 30, 2020, 7:35 pm

          Automation of closing of all options that are open on expiry day starts at 3.15 and ends by 3.20. Note that out of the money options are not closed by broker as its not required. At the closing time time whatever is the market price you will get that. Therefore looking at option prices after market hours does not makes sense.

          There is a reason why some option closes well below their intrinsic level. That’s a long topic.

          So your answer is neither 745 nor 848 – it will be closed at market price at the time your broker’s software will close your option.

          Hope this helps.

          • tg July 31, 2020, 9:10 am

            then it will be lose if broker close at market price as, some very deep in the money optino has huge difference in the price. due to less buyer and seller. am i right?

            • Dilip Shaw July 31, 2020, 11:59 am

              Yes correct therefore you must close all trades yourself before 3.15 on the expiry day. Out of the money options whether bought or sold need not be closed to save brokerages and taxes.

Leave a Comment

Social Share Buttons and Icons powered by Ultimatelysocial