Investing Do Not Exercise DNE CTM physical settlement STT

Do Not Exercise (DNE) option

From WebNotes, a public knowledge base. Last updated 21 June 2026. Reading time ~12 min.

Key facts

What DNE was	A facility letting brokers instruct the clearing corporation not to exercise close-to-money (CTM) option strikes on behalf of clients
Introduced	August 2017, to overcome the STT trap on exercised in-the-money options
CTM definition (calls)	The three in-the-money strikes immediately below the final settlement price
CTM definition (puts)	The three in-the-money strikes immediately above the final settlement price
DNE discontinued	NSE circular dated 29 September 2021, withdrawal of DNE for CTM strikes effective 14 October 2021
STT on exercise (current)	0.15% on the intrinsic value of an exercised option from 1 April 2026 (0.125% from 1 September 2019 to 31 March 2026), not on the full contract value

Do Not Exercise (DNE) was a facility that let a broker instruct the clearing corporation not to exercise an in-the-money, close-to-money (CTM) option strike on a client’s behalf at expiry, introduced by the exchanges in August 2017 and discontinued for CTM strikes by the National Stock Exchange from 14 October 2021. It existed to protect option buyers from two problems at expiry: the securities transaction tax (STT) trap on exercised options, and an unwanted physical-delivery obligation on a marginally in-the-money stock option. This article explains the CTM framework DNE operated on, the STT rationalisation that removed its original purpose, the timeline of its withdrawal, and the current position on auto-exercise of in-the-money options at Zerodha .

DNE is now of mostly historical and conceptual importance, because the facility has been withdrawn for CTM strikes and all in-the-money options are exercised at expiry. Understanding why it was introduced and why it was withdrawn explains the current rules on STT on options exercise and physical settlement of stock F&O .

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this article does not carry it and earns no referral commission.

The STT trap that DNE solved

Before the STT rules were rationalised, the securities transaction tax on an exercised in-the-money option was charged at 0.125% on the full contract value, not on the option’s intrinsic value. For an option that finished only marginally in the money, this produced a tax that could exceed the entire profit on the trade, and in some cases exceed the premium the buyer had paid. A buyer holding a slightly in-the-money option to expiry could end up with an STT bill larger than the option’s intrinsic value, turning a small notional profit into a real loss. This was the STT trap.

To fix it, the exchanges introduced the DNE facility in August 2017, after representations from the industry about the STT problem. SEBI’s Risk Management Review Committee took the view that DNE would safeguard the interests of options traders. The facility let a broker tell the clearing corporation not to exercise the client’s CTM strikes, so a buyer whose option had finished only just in the money could decline exercise and avoid an STT bill that exceeded the intrinsic value. DNE therefore did two jobs: it sidestepped the STT trap, and, once compulsory physical settlement arrived, it spared buyers an unwanted delivery obligation on a marginally in-the-money stock option.

The CTM framework

DNE operated only on close-to-money (CTM) strikes, a category the exchanges defined as a subset of in-the-money (ITM) contracts that expire with small intrinsic value. The CTM definition is precise:

For call options, the three in-the-money strikes immediately below the final settlement price are CTM.
For put options, the three in-the-money strikes immediately above the final settlement price are CTM.

These are the strikes closest to the settlement price on the in-the-money side, where the intrinsic value is small and the STT trap was most damaging. A deep in-the-money strike, far from the settlement price, carries large intrinsic value and was never CTM; DNE did not apply to it, because a deep ITM holder genuinely wants the intrinsic value and the STT on it is small relative to the gain. The CTM boundary, three strikes, drew the line between marginally in-the-money strikes (where declining exercise made sense) and meaningfully in-the-money strikes (where it did not).

Option type	CTM strikes
Call	The three ITM strikes immediately below the final settlement price
Put	The three ITM strikes immediately above the final settlement price

The STT rationalisation of September 2019

The STT trap was fixed at its root before DNE was withdrawn. From 1 September 2019, STT on exercised option contracts was charged at 0.125% on the intrinsic value of the option, how much the option is in the money, rather than on the full contract value as earlier. Because the intrinsic value of an out-of-the-money option is always zero, an OTM option attracts no STT on exercise at all. For an in-the-money option, the STT is now a small fraction of the intrinsic value rather than a tax on the whole notional.

Zerodha’s worked example shows the scale of the change. If you hold one lot of 11000 calls and the market expires at 11050, the intrinsic value is 50 points. STT is now 0.125% of (11050 minus 11000) times the lot size of 75, which is about Rs 5. Under the old rule, STT was 0.125% of the full contract value, 11050 times 75, which was about Rs 1,000. The same exercised option that once attracted roughly Rs 1,000 in STT now attracts roughly Rs 5. The rationalisation removed the STT trap entirely for the marginally-in-the-money case that DNE was built to handle. The intrinsic-value base has applied ever since; only the rate has moved, from 0.125 per cent to 0.15 per cent with effect from 1 April 2026 under the Finance Act 2026, so the arithmetic above scales by roughly one-fifth at the current rate.

Measure	Old STT rule	Rule from 1 September 2019
Basis	0.125% of full contract value	0.125% of intrinsic value
11000 call, expiry 11050, lot 75	About Rs 1,000	About Rs 5
OTM option on exercise	STT on full value	Nil (intrinsic value is zero)

The withdrawal of DNE

With the STT trap fixed in September 2019, the main reason DNE existed had gone. NSE issued a circular dated 29 September 2021 announcing the discontinuation of the DNE facility for CTM strikes, and the withdrawal took effect on 14 October 2021. After that date, CTM in-the-money options are exercised and settled like any other in-the-money option; a broker can no longer instruct the clearing corporation to decline exercise on the client’s behalf.

The compulsory physical-settlement framework for stock derivatives, which began in October 2019, ran alongside this. Once stock F&O became physically settled, a marginally in-the-money stock option exercised at expiry converts into a share-delivery obligation. The withdrawal of DNE means a buyer holding a CTM stock option to expiry now takes that delivery, and must fund it, rather than being able to decline exercise. For index options, which are cash-settled, the consequence is only the settlement of intrinsic value in cash.

Implications of the withdrawal

With DNE removed, the settlement mechanics for a buyer holding an in-the-money stock option to expiry changed. The stock settlement is done in the delivery segment, where the options trader must pay the required margin and take delivery of the shares. That margin is high, and a trader who took a strike to expiry without the full amount in the demat account faced interest and penalties. The delivery-margin ramp near expiry and the physical-settlement obligation now bite directly on any in-the-money stock option held to expiry, with no DNE escape.

Zerodha’s co-founder Nithin Kamath flagged the increased risk to option buyers when the change was made. He said that with the mandatory removal of DNE, especially for buying options, the risk of huge losses had gone up significantly if out-of-the-money options become in-the-money and there is no liquidity to exit. Market commentators had mixed views: some saw a negative impact on options volume because traders lost the auto-square-off comfort, while others argued the withdrawal would discourage high-risk options trades and push activity toward cash, which they viewed as lower risk for the typical trader.

The current position on auto-exercise

The current rule is straightforward: all in-the-money options, including CTM strikes, are exercised at expiry. There is no Do Not Exercise option for CTM strikes. The consequence depends on the underlying:

Index options (Nifty, Bank Nifty) are cash-settled; an in-the-money index option pays its intrinsic value in cash at expiry.
In-the-money stock options are physically settled; the option converts into a share-delivery obligation that the holder must fund, subject to the delivery-margin ramp .

Because there is no DNE backstop, the practical advice for a stock-option holder who does not want to take or give delivery is to square off the in-the-money option before expiry. You can close an in-the-money stock option until 3:30 PM on expiry day. The routes to avoid an unwanted delivery are set out in how to avoid physical settlement of options , and the obligation itself in physical settlement of stock F&O . The STT rationale that drove DNE, captured in STT on options exercise , is now the reason auto-exercise is no longer punitive for the marginally-in-the-money buyer.

External references

References

NSE circular dated 29 September 2021, discontinuation of the Do Not Exercise (DNE) facility for close-to-money (CTM) strikes, effective 14 October 2021, nseindia.com.
Zerodha Z-Connect, “Policy on settlement of compulsory delivery derivative contracts”, zerodha.com (as of 21 June 2026): DNE introduced August 2017; CTM defined as the three ITM strikes immediately below (calls) or above (puts) the final settlement price.
STT rationalisation effective 1 September 2019, STT charged at 0.125% of the intrinsic value of an exercised option rather than the full contract value; worked example, 11000 call expiring 11050, lot 75, STT about Rs 5 against about Rs 1,000 earlier.
SEBI, framework on compulsory physical settlement of stock derivatives, sebi.gov.in.

Frequently asked questions

What was the Do Not Exercise (DNE) facility?

DNE let a broker instruct the clearing corporation not to exercise close-to-money option strikes on a client’s behalf at expiry. It shielded buyers from the STT trap and from a physical-delivery obligation on marginally in-the-money options.

Why was DNE introduced?

It was introduced in August 2017 to overcome the STT trap, where STT was charged on the full contract value of an exercised in-the-money option, often exceeding the option’s intrinsic profit.

What does close-to-money (CTM) mean?

CTM is a subset of in-the-money strikes that expire with small intrinsic value. For calls it is the three in-the-money strikes immediately below the settlement price; for puts, the three immediately above it.

When was DNE discontinued?

NSE issued a circular dated 29 September 2021 discontinuing the DNE facility for CTM strikes, effective 14 October 2021. After that, CTM in-the-money options are exercised and settled like any other ITM option.

Why was DNE withdrawn?

Because the STT trap that DNE was built to solve had already been fixed in September 2019, when STT on exercised options was rationalised to 0.125% of intrinsic value rather than the full contract value, removing the original reason for DNE.

Are ITM options auto-exercised now?

Yes. With DNE withdrawn, all in-the-money options, including CTM strikes, are exercised at expiry. Index options settle in cash; in-the-money stock options are physically settled and convert into a delivery obligation.

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Last reviewed: 21 June 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.