How are F&O contracts physically settled?
If an open stock F&O contract position is not squared-off by its expiry date, it will be settled by taking/giving physical delivery of the shares. Hence, a trader will have to actually take/give delivery of the underlying stock as part of the settlement process (instead of settling it with cash as in the case of index F&O contracts).
From March 2023, open equity F&O positions will be settled based on the net obligations of positions in the equity (cash) segment and physical settlement in the F&O segment. Read more.Open Futures Contracts:
Stock futures positions that are open at the end of the expiry day will have to be compulsorily physically settled:
- Long Futures positions will have to buy (receive) the underlying stock.
- Short Futures position will have to sell (deliver) the underlying stock.
For example, Ms Tina has a long position on 1 lot (1500 shares) of SBI futures and has not rolled over or closed the position by the expiry date. As a result, she will have to mandatorily take physical delivery of 1500 SBI shares in her demat account by paying for the entire contract value.
On the other hand, if she is short on 1 lot of SBI futures and has not rolled over or closed the position by the expiry date, she will have to mandatorily give physical delivery of 1500 SBI shares from her demat account on the expiry date.
Open Options Contract:
All open In the Money (ITM) long/short, call/put contracts are compulsorily physically settled on the expiry date:
| Initial Transaction | Open Position on Expiry | Settlement |
|---|---|---|
Bought a Call Option | ITM Long Call | Take delivery of the shares by paying for the entire contract value. |
| Sold a Call Option | ITM Short Call | Give delivery of the agreed quantity of shares and receive payment for the sale value. |
| Bought a Put Option | ITM Long Call | Give delivery of the agreed quantity of shares and receive payment for the sale value. |
| Sold a Put Option | ITM Short Call | Take delivery of the shares by paying for the entire contract value. |
The closing price (and not the last traded price) of the underlying stock is used to determine whether an option's strike is the ITM or OTM.
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