How to physically settle an in-the-money option

Physical settlement means that an in-the-money stock option or stock futures contract, if held to expiry on NSE, results in the actual delivery of the underlying shares rather than a cash payment of the difference between the option price and the settlement price. SEBI mandated physical settlement for all NSE stock derivatives via a circular in April 2018. This guide explains what happens, what your obligations are, how to confirm settlement, and what costs arise.

If you want to avoid physical settlement entirely, see How to avoid physical settlement (manual close-out).

Which contracts are physically settled

Physically settled: all NSE stock futures and stock options. This includes single-stock futures and options on any NSE-listed company approved for F&O trading.

Cash settled: all index derivatives (Nifty 50 options and futures, Bank Nifty options and futures, Nifty Midcap Select, Sensex, Bankex, etc.). These settle to the final settlement price, which is the closing spot value of the index on expiry day, with the profit or loss paid entirely in cash.

A contract is ITM and subject to physical settlement if it has positive intrinsic value at expiry:

• Long call / Short put: strike price < expiry settlement price of the stock.
• Long put / Short call: strike price > expiry settlement price of the stock.

OTM options expire worthless with no settlement obligation (beyond the premium already paid or received).

Settlement obligations by position type

The settlement price is the closing spot price of the stock on expiry day as determined by NSE.

Step-by-step procedure

Confirm whether your option is in-the-money at expiry

On the last trading day (expiry day), monitor the underlying stock’s closing price. For monthly contracts, expiry is the last Thursday of the month. For weekly stock option expiries, check the NSE contract specification for the exact date.

After the market closes at 3:30 PM IST on expiry day, the settlement price is announced by NSE (typically within 30–60 minutes of close). An option that has even ₹0.01 of intrinsic value is ITM and will be exercised automatically. There is no opt-out; if the option is ITM at expiry, settlement proceeds automatically.

Understand your resulting obligation

You are long an ITM call (for example, long RELIANCE 1400 CE, spot closes at 1450):

• You are entitled to buy shares at ₹1,400 each.
• NSE settlement obliges you to pay ₹1,400 × lot size (for example, 250 shares = ₹3,50,000).
• You receive 250 Reliance shares credited to your demat account on T+1.

You are short an ITM call (for example, short RELIANCE 1400 CE, spot closes at 1450):

• You are obligated to deliver 250 Reliance shares at ₹1,400 each.
• If you hold 250 Reliance shares in your demat account: they are debited from demat; you receive ₹3,50,000.
• If you do NOT hold the shares: Zerodha must source them. This results in an auction or close-out by the clearing corporation at the market price, which may be higher than 1,450. You bear the cost difference plus auction penalties.

You are long an ITM put (for example, long INFOSYS 1600 PE, spot closes at 1550):

• You are entitled to sell shares at ₹1,600 each.
• You must deliver the lot-size quantity of Infosys shares.
• If you hold the shares in demat: they are debited; you receive ₹1,600 × lot size.
• If you do NOT hold the shares: you must first buy them in the market or from the auction.

You are short an ITM put (for example, short INFOSYS 1600 PE, spot closes at 1550):

• You are obligated to buy shares at ₹1,600 each.
• The contract value is debited from your trading account, and shares are credited to your demat.

Ensure adequate delivery margin is available

Starting from 4 trading days before expiry (Zerodha’s policy as of 2024), Zerodha begins blocking delivery margin on ITM stock option positions. The delivery margin is approximately 20–50 percent of the full contract value (the higher of SPAN + ELM or the exchange-mandated delivery margin percentage).

This means that from Tuesday of expiry week (for Thursday expiry), your available margin in Kite may be reduced. If you are holding a large ITM position, ensure your account has:

• Sufficient cash or collateral to cover the delivery margin block.
• For call assignments: the cash to pay for shares at the strike price × lot size (full contract value, not just margin).
• For put exercises where you hold shares: the shares must be in the demat account without any existing pledge or lien.

Zerodha notifies clients via email and in-app when delivery margin is being blocked. Watch for these notifications in the final week of the contract.

Await automatic settlement

You do not need to take any action to initiate physical settlement. NSE’s clearing corporation (NSCCL) handles exercise and assignment automatically.

The settlement timeline for the expiry Thursday is as follows:

Monitor your Kite trading account and demat account via Zerodha Console in the days following expiry.

Confirm settlement in Console

Log in to console.zerodha.com:

• Holdings page: if you received shares via long call exercise or short put assignment, they appear here on T+1.
• Funds statement: the debit or credit for the settlement is visible in the funds statement for the T+1 date.
• Contract note: the settlement transaction appears in the contract note for expiry day, distinguishing between the F&O P&L and the settlement obligation.

If shares appear in Holdings as demat holdings, they are freely sellable during normal market hours from T+1 onwards (subject to demat credit timings; NSE settlement is T+1 so shares are credited by the start of the T+1 session for most brokers).

STT implications for physical settlement

For long ITM options that are exercised, STT is levied on the full settlement value (not on the premium), which is significantly higher than the STT on a normal options trade. For a long call:

STT on exercise = 0.1 percent × settlement price × lot size

Example: Long 1 lot RELIANCE 1400 CE exercised at settlement price ₹1,450. STT = 0.1% × 1,450 × 250 = ₹362.50

Compare this to the STT if you had sold the option before expiry: STT on sell = 0.05% × option premium × lot size = 0.05% × (say ₹50 premium) × 250 = ₹6.25

The exercise STT is approximately 58 times higher in this example. This is a material cost that favours closing ITM long options before expiry rather than allowing them to be exercised. For the procedure to close before expiry, see How to avoid physical settlement (manual close-out).

What can go wrong

• Short ITM call without shares in demat. You must deliver shares you do not hold. The clearing corporation sources them via auction at whatever price is available, which can be significantly above market. The difference is your loss, plus auction penalties.
• Insufficient funds for obligated purchase. If your account does not have the cash to pay for shares you are obligated to buy (long call exercise or short put assignment), Zerodha may close the position prior to settlement under its risk management policy, potentially at an unfavourable price.
• Pledged shares cannot be used for delivery. If the shares in your demat account are pledged as collateral for margin, they are encumbered and cannot be directly delivered without first unpledging. Allow 1–2 working days for the unpledging process; do not wait until expiry day.
• Demat account in a different BO ID. If your trading account (Zerodha) and demat account are not linked, share credits and debits may not be automatic. Verify the linkage in Console before relying on seamless settlement.

Related guides

• How to avoid physical settlement (manual close-out)
• How to roll over an F&O position on Zerodha
• How to exit a multi-leg F&O position on Zerodha
• How to calculate margin using the Zerodha SPAN calculator
• F&O segment on Zerodha

References

1. SEBI Circular SEBI/HO/MRD/DP/CIR/P/2018/67 dated 11 April 2018, Physical settlement of stock derivatives.
2. SEBI Circular SEBI/HO/MRD/DRMNP/CIR/P/2019/53 dated 14 March 2019, Revised guidelines on physical settlement.
3. NSE circular on physical settlement procedures, NSE/FAOP/39225 and subsequent updates.
4. Zerodha support article: “Physical settlement of stock F&O”, support.zerodha.com.
5. Zerodha support article: “STT on physical settlement of in-the-money options”, support.zerodha.com.
6. SEBI Circular SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/120 dated October 2024, Derivatives rationalisation.