First what is physical delivery of stocks in options & futures (derivative) trading?
All over the world, on the expiry day derivatives are either settled by cash or stocks. Until June 2018 in India all derivatives – options and futures were cash settled. Well no more – Securities and Exchange Board of India has introduced long awaited physical settlements of stocks from July 2018 in 46 stocks only (list below), but soon I assume all the 170+ stock F&O contracts will be physically settled. From July 2018, there will be physical settlement in equity derivatives (options and futures both).
Examples of physical settlement in equity derivatives:
If you were long future (buy) and did not close the future trade before expiry you will have to take delivery of stocks means buy the stocks equal to the lot size on the settlement date which is T+2 day.
Does it matter if you made a loss or profit? No it does not matter – you did not close the future trade so take the delivery. If course if you made a profit you can buy then immediately sell the stock and book your profits and get your cash back.
If you were short future (sell) and did not close the future trade before expiry you will have to give delivery of stocks means sell the stocks equal to the lot size on the settlement date which is T+2 day.
What happens if you do not own the stock (the stock is not there in your demat account)? It goes into auction and frankly this is THE WORST situation to be in. In an auction an investor NEVER gets the market price of the stock being auctioned. Once I shorted a stock intraday but did not close it went into auction. Note than in those days (2007-08) the system of stock trading were not that smart like to day (2018). So what happened? A stock for 560 (approx) was auctioned for 582 (approx) – 4% more and given to me. So I lost 4% more than what was my actual loss. Thankfully I traded in only a few stocks so the loss was bearable, however now-a-days lot size is HUGE. If your short futures goes into auction for non-delivery of shares, then we are talking about 40-50 thousand loss (approx) on top of your actual loss. So even if you made a profit you may have to suffer a loss.
Option Buy and In The Money:
Call option buy and In the Money and not closed before expiry, then you have to take delivery of the stock just as a future buy. This is very bad news for Option Buyers. They pay a small premium but can get dangerous if the option was not closed before expiry day.
Call option sell and In the Money and not closed before expiry, then you have to give delivery of the stock just as a future sell. If you are unable to deliver the stock (the stock is not there in your demat account) then you will have to buy from auction and give delivery. Worst case please read above to know.
You must be thinking why auction – why not buy and deliver from the cash market? The reason is simple. Physical Delivery of the stocks must be done in T+2 days. That means the last day to buy the shares from equity markets in cash without auction is the expiry day itself. In this case the equity comes in your account in T+2 days and then is delivered the same day. However on T+2 day you cannot do that – the only option is to get stocks from auction which means buy stocks at a higher price than prevailing market price.
Put option buy (long puts) and In the Money is same as short futures. You have to give delivery of stocks.
Put option sell (short puts) and In the Money is same as long futures. You have to take delivery of stocks.
To Summarize What Happens In Physical Delivery Of Stocks In Derivative Trading:
You have to take physical delivery of stocks in these trades if not closed before expiry on T+2 day:
Long Futures, Long Calls, Short Puts
You have to give physical delivery of stocks in these trades if not closed before expiry on T+2 day:
Short Futures, Long Puts, Short Calls
Will all not-closed futures and options trades will be affected?
No these derivative trades will be affected:
All Futures whether buy/sell but not closed before expiry, and
All IN THE MONEY (ITM) Options whether sold/bought but not closed before expiry.
Here is the list of 46 stocks in which Physical Delivery Of Stocks In Derivative Trading will come into effect from the month of July 2018:
Please note that stock ONE lot size in terms of money is anywhere from Rs. 7 lakh to 10 lakh. So be very careful while trading options and futures in these stocks henceforth. If you trade make sure you close your trades before the expiry day even if your options may expire worthless. You should also hedge your trades so that even if you take/give delivery of the stocks the loss is going to be very small:
1 ADANIPOWER ADANI POWER LIMITED
2 AJANTPHARM AJANTA PHARMA LIMITED
3 ALBK ALLAHABAD BANK
4 ANDHRABANK ANDHRA BANK
5 BALRAMCHIN BALRAMPUR CHINI MILLS LIMITED
6 BEML BEML LIMITED
7 BERGEPAINT BERGER PAINTS (I) LIMITED
8 CANFINHOME CAN FIN HOMES LIMITED
9 CGPOWER CG POWER AND INDUSTRIAL SOLUTIONS LIMITED
10 CHENNPETRO CHENNAI PETROLEUM CORPORATION LIMITED
11 DCBBANK DCB BANK LIMITED
12 GODFRYPHLP GODFREY PHILLIPS INDIA LIMITED
13 GODREJIND GODREJ INDUSTRIES LIMITED
14 GRANULES GRANULES INDIA LIMITED
15 GSFC GUJARAT STATE FERTILIZERS & CHEMICALS LIMITED
16 HEXAWARE HEXAWARE TECHNOLOGIES LIMITED
17 HCC HINDUSTAN CONSTRUCTION COMPANY LIMITED
18 IDBI IDBI BANK LIMITED
19 IFCI IFCI LIMITED
20 JPASSOCIAT JAIPRAKASH ASSOCIATES LIMITED
21 JUSTDIAL JUST DIAL LIMITED
22 KSCL KAVERI SEED COMPANY LIMITED
23 KPIT KPIT TECHNOLOGIES LIMITED
24 MGL MAHANAGAR GAS LIMITED
25 MRPL MANGALORE REFINERY AND PETROCHEMICALS LIMITED
26 NHPC NHPC LIMITED
27 NIITTECH NIIT TECHNOLOGIES LIMITED
28 OIL OIL INDIA LIMITED
29 OFSS ORACLE FINANCIAL SERVICES SOFTWARE LIMITED
30 ORIENTBANK ORIENTAL BANK OF COMMERCE
31 PTC PTC INDIA LIMITED
32 PVR PVR LIMITED
33 RCOM RELIANCE COMMUNICATIONS LIMITED
34 RNAVAL RELIANCE NAVAL AND ENGINEERING LIMITED
35 RPOWER RELIANCE POWER LIMITED
36 REPCOHOME REPCO HOME FINANCE LIMITED
37 SIEMENS SIEMENS LIMITED
38 SREINFRA SREI INFRASTRUCTURE FINANCE LIMITED
39 SRF SRF LIMITED
40 SYNDIBANK SYNDICATE BANK
41 RAMCOCEM THE RAMCO CEMENTS LIMITED
42 TORNTPOWER TORRENT POWER LIMITED
43 TV18BRDCST TV18 BROADCAST LIMITED
44 UBL UNITED BREWERIES LIMITED
45 VGUARD V-GUARD INDUSTRIES LIMITED
46 WOCKPHARMA WOCKHARDT LIMITED
If you are trading in any of the above stock derivative then please close your position at least 2 days before expiry else your RM or your broker will close it any-day without informing you.
And they have the right to do so? Why? Because if you default to buy the stock or give that many stocks as physical delivery the your broker will be at HUGE RISK — he/she will have to pay from their own pocket.
Obviously they will not take a risk and close your trade. Note that you are their not the only customer – that they can try to take risk. But they have many – so they will just close and not take the risk.
Why 2-3 days before? Because they will come into action to save risk of default 2-3 days before expiry.
Is there anything else you can do? Yes Rollover your future and options, or just DO NOT trade the above stocks in F&O segment.
There is a better way.
You Can Read More On My Site
What you should do now1. If you have still not subscribed for my free 5 days course you can do by filling the form above. You will learn a lot about option trading.
2. If you are a new option trader, not much experienced and are making losses you can do my paid course. I recommend Nifty Conservative Option Course for beginners because it is easy to understand and easy to trade. Even a 18 year old young trader or a housewife can learn it and start trading from next day. It will help you to earn consistent monthly income without any software or speculation or stress or big risk. You will learn proper hedging strategies that works in any market condition.
3. If you are banknifty weekly options trader you can do my Bank Nifty Weekly Options & Futures Strategy Course. You will learn future and option hedging strategies that works in volatile market condition.
TestimonialsWhat Traders Say About My Course
Course fees: Click here to know the course fees.
Here is complete process of my course1. Once you pay I will send you the course materials for studying to your email.
2. You read and ask me questions via phone/whatsapp/email to clear doubts.
3. Then you start paper trading and still can ask me questions.
4. After about one month you can start trading.
5. Since doubts can come anytime the support will be there for one year.
Within one month you can start trading on your own. No need to depend on anyone once you are on your own.
If you have any question you can contact me.
You can read about me here and my trading mistakes here.
Dilip Shaw, Founder
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. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.