Investing Delivery margin Physical settlement F&O

Delivery margin field on Kite

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The delivery margin field on the Kite funds page shows the additional margin held against open stock F&O positions in their last few days before physical settlement . This is on top of the regular SPAN + Exposure margin.

What physical settlement is

Since SEBI mandated physical settlement for stock F&O (April 2018, fully effective by 2019):

  • Stock futures and options contracts settle by delivery, not cash.
  • The seller delivers the underlying shares; the buyer pays the strike value (for options) or settlement price (for futures).
  • For an ITM option, the delivery obligation is the lot size of underlying shares.

The settlement happens on the expiry date (last Thursday of the contract month for most NSE stock F&O).

Pre-expiry delivery margin layer

In the days leading to expiry, NSE introduces an additional margin requirement:

Days to expiryApproximate additional margin
4 trading days10% of the contract’s notional value
3 trading days25% of notional
2 trading days50% of notional
1 trading day (E-1)Full notional value

For an ITM stock option position held to expiry, the user effectively needs to hold the full notional value as margin during the last day. This is to ensure they can deliver / receive the underlying shares.

The pre-expiry delivery margin is on top of SPAN + Exposure; it does not replace them.

Impact on margin available

For a trader with a Rs 5 lakh notional stock futures position open at expiry-week:

  • SPAN + Exposure: ~Rs 50,000.
  • Pre-expiry delivery margin (T-1): Rs 5 lakh.
  • Total margin required: Rs 5.5 lakh.

If you had only Rs 1 lakh in margin available at the start of the week (sufficient for the regular SPAN), you face a margin shortfall as the delivery margin layer kicks in.

Strategies to avoid the spike

Most retail traders close their stock F&O positions before the pre-expiry margin layer triggers:

  1. Close 4 days before expiry (avoid the 10% layer).
  2. Roll over to next-month contracts (close current, open new).
  3. Take delivery if intentional: ensure you have the cash for ITM call assignment (full notional payment).

Cash-settled index F&O (Nifty, BankNifty, FinNifty, MidcapNifty options and futures) do not have pre-expiry physical-delivery margin. Only stock F&O does.

How Kite surfaces the delivery margin

The field appears on the funds page as a separate line:

  • Margin available: Rs X.
  • Margin used: Rs Y.
  • Of which Delivery margin: Rs Z.

The delivery margin component is included in the total margin used. The user can see how much of the margin used is from delivery layer versus regular SPAN.

Settlement on expiry day

If a stock F&O position is held to expiry:

  • OTM option: Lapses; full margin released.
  • ITM option (long): Buyer receives the underlying shares (call) or pays strike for delivery (put).
  • ITM option (short): Seller delivers shares (call) or receives strike (put).
  • Stock future at expiry: Long takes delivery; short delivers.

The delivery obligation is automatic at expiry; the cash / shares are transferred via the depository and clearing system.

Console reporting

Console > Reports > Tradebook shows the settlement details for any expired position. For tax purposes, the delivery is treated as a sale of the F&O contract plus a deemed buy / sell of the underlying at the settlement value.

See also

External references

References

  1. SEBI, Physical settlement of stock derivatives, circular dated 11 April 2018.
  2. NSE, Stock derivatives, physical settlement methodology, nseindia.com.
  3. Zerodha Support, Delivery margin and physical settlement, support.zerodha.com.
  4. Zerodha margin policies, Pre-expiry margin layer for stock F&O, zerodha.com.

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