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What Is Physical Delivery Of Stocks In Derivative Trading

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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:

Future Buy:

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.

Future Sell:

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.

Just trade Nifty and Bank Nifty future and options. They are not stocks so will never have this physical settlement problem.


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