Physical Settlement

The intuition

With an index there is nothing to deliver, so cash stands in for it. With a stock there is, and the regulator decided in 2018 that stock derivatives should end the way the contract literally says: a call holder who is in the money buys the shares at the strike; a put holder sells them. The purpose was to anchor stock futures and options to the real shares, making manipulation of the expiry price harder and discouraging leveraged positions that nobody intends to hold.

The consequence for a retail trader is a change of scale. A stock option costs the premium, a few thousand rupees per lot. If it finishes in the money and is held through expiry, the trader is now buying or selling a lot of shares worth lakhs. Brokers block delivery margins over the final week to make sure the funds or the shares will be there.

Formula and who delivers

Position at expiry	Obligation	Cash flow
Long ITM call	receive shares	pay strike × lot size
Short ITM call	deliver shares	receive strike × lot size
Long ITM put	deliver shares	receive strike × lot size
Short ITM put	receive shares	pay strike × lot size
Long futures	receive shares	pay final settlement price × lot size
Short futures	deliver shares	receive final settlement price × lot size

Delivery margin per broker schedules (illustrative, based on commonly published ladders): a rising percentage of the cash-segment margin (VaR plus ELM plus any ad hoc margin) on the contract value, from about 10% on E-4 to 100% on expiry day. Exact steps vary by broker; the broker’s policy page is the operative schedule.

Worked example (illustrative numbers)

Suppose a stock trades at ₹1,560 with a lot size of 500 shares, and a trader bought the ₹1,500 call a month earlier for ₹40 (₹20,000). On expiry Thursday the stock closes at ₹1,580 and the call is in the money by ₹80.

Choice	What happens	Cash needed	Outcome
Sell the call before close at ₹82	position closed	none	+₹21,000 realised
Hold through expiry	receive 500 shares at ₹1,500	₹7,50,000 on settlement	shares worth ₹7,90,000 delivered; STT and delivery margins apply

The second row is the one that surprises people. The trader’s ₹20,000 option has become a ₹7.5 lakh purchase. If the funds are not in the account, the broker will have squared the position off earlier in the week under its policy, or will sell the delivered shares, with charges, to recover the shortfall. From E-4 the broker would already have been blocking a growing delivery margin on the contract value, which is the usual first warning.

Why it matters to an options trader

• Stock options need a plan for expiry week. Close, roll, or fund the delivery; doing nothing is a decision to take or make delivery.
• Short stock puts are a share purchase. A written put that finishes in the money delivers shares against the full strike value, which is why cash-secured put writing is a stock-accumulation strategy on NSE.
• Delivering without shares is a failed delivery. A short call or long put holder without the shares in demat goes to auction, with penalties; brokers close such positions in advance.
• Liquidity thins in expiry week. As brokers raise delivery margins, many participants exit, and spreads on in-the-money stock options widen.

Common mistakes

• Holding an ITM stock option “to collect the cash”. There is no cash; there are shares and a bill for the strike value.
• Treating the premium as the capital at risk in expiry week. Delivery margins run on contract value and are blocked from E-4.
• Forgetting the long put side. A long ITM put must deliver shares; a trader holding a put as a hedge without the shares faces auction.
• Expecting the broker to warn by phone. Policies permit square-off without notice when margins are short; the schedule is published, not announced.

Indian-market specifics

• SEBI mandated physical settlement of stock derivatives in a phased manner from 2018, completed for all stock futures and options from the October 2019 expiry. Index derivatives remain cash-settled.
• Stock options on NSE are European: exercise happens only at expiry, automatically for in-the-money contracts, so delivery obligations arise only on expiry day.
• Monthly stock derivatives expire on the last Tuesday of the month on NSE (previous trading day if a holiday); settlement of the delivery follows the cash-segment pay-in and pay-out cycle after expiry.
• Brokers block delivery margins on in-the-money and near-the-money stock positions from E-4 (four sessions before expiry), typically as a rising share of the cash-segment VaR plus ELM margin on contract value, reaching 100% on expiry day; the exact ladder is in each broker’s published policy.
• The do-not-exercise (DNE) facility for stock options was withdrawn by NSE Clearing from 30 March 2023 (after a reintroduction in April 2022); every in-the-money stock option at expiry is now exercised and delivered.

FAQ

Which contracts are physically settled on NSE?

All stock futures and ITM stock options; index contracts are cash-settled.

What happens if I hold an in-the-money stock call through expiry?

You buy the full lot of shares at the strike and must fund it.

What is the delivery margin in expiry week?

A rising margin from E-4 to 100% on expiry day.

Can I avoid physical settlement?

Yes: close or roll before expiry; OTM options lapse.

Related terms

• Cash Settlement, how index contracts settle
• Delivery Margin, the expiry-week ladder
• Assignment, the writer’s side of delivery
• Do Not Exercise, withdrawn for stock options in 2023