Physical Settlement on WebNotes

Do Not Exercise (DNE) option

Sun, 21 Jun 2026 00:00:00 +0000

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 .

How to sell a call option on Zerodha Kite

Sun, 21 Jun 2026 00:00:00 +0000

Writing a call option means selling a contract you do not own, collecting the premium, and taking on the obligation to deliver the underlying at the strike price if the buyer exercises. On Zerodha Kite this is a sell-to-open order on the NFO segment, and it is one of the highest-risk trades a retail account can place. The writer’s gain is capped at the premium received; the loss on a naked (unhedged) short call is theoretically unlimited, because the spot price can rise without a ceiling.

Moneyness: in-the-money, at-the-money, out-of-the-money

Sun, 21 Jun 2026 00:00:00 +0000

Moneyness is the classification of an option by where the price of the underlying sits relative to the strike, which determines whether the option carries intrinsic value. An option is in-the-money (ITM) when exercising it would yield a positive payoff, at-the-money (ATM) when the underlying is at or nearest the strike, and out-of-the-money (OTM) when exercising would yield nothing. Moneyness sets the split between intrinsic and time value in the premium, maps directly to delta , and, for single-stock options on Indian exchanges, decides whether a contract left to expiry triggers compulsory physical delivery.

Physical delivery risks in stock F&O

Sun, 21 Jun 2026 00:00:00 +0000

Overview

Physical delivery risk in stock F&O is the exposure a trader carries when a single-stock futures or in-the-money stock option position is held into expiry and converts into an obligation to take or give delivery of the underlying shares at full contract value. The hazard is the gap between the small premium that prices an option and the large contract value behind it: a long in-the-money call bought for a few thousand rupees can become an obligation to pay several lakh rupees and receive the entire lot (NSE Clearing physical-settlement framework). Stock derivatives on the National Stock Exchange have been physically settled since October 2019; index derivatives are cash settled and carry none of this risk.

Physical delivery timing on Zerodha

Sun, 21 Jun 2026 00:00:00 +0000

Overview

Physical delivery timing on Zerodha is the schedule on which margins ramp, obligations are computed, and shares and funds move when a stock futures or in-the-money stock option position is carried into expiry under compulsory physical settlement. The delivery margin steps up over the four trading days before expiry, the obligation is fixed after the close of the expiry session, and the actual transfer of shares and cash happens on the second trading day after expiry, Expiry plus 2 (NSE Clearing equity-derivatives settlement framework). Index derivatives are cash settled and carry none of this; only single-stock derivatives are physically settled, a rule in force since the physical settlement of stock F&O regime took effect in October 2019.

Risks of F&O trading on Zerodha

Sun, 21 Jun 2026 00:00:00 +0000

Futures and options trading carries risks that differ in kind, not just degree, from buying shares. A delivery investor in Zerodha can lose at most the money put in. An F&O trader using leverage can lose a multiple of the margin posted, can be forced out of a position at the worst possible moment by a margin call, and, in the case of a written call option, faces a loss with no fixed ceiling. The Securities and Exchange Board of India (SEBI) studied the segment and found that most individual traders lose money: about 91 per cent posted net losses over three financial years, with the aggregate loss running to Rs 1.81 lakh crore.

Stock-option restrictions near expiry

Sun, 21 Jun 2026 00:00:00 +0000

Stock options are restricted near expiry because all single-stock derivatives on the National Stock Exchange are compulsorily physically settled on expiry, and an in-the-money stock option that is held to expiry converts into an obligation to give or take delivery of the underlying shares. To make traders fund that obligation in advance, the exchange applies a physical-delivery margin ramp on in-the-money stock options starting four days before expiry, and Zerodha layers its own controls on top: it blocks fresh deep-in-the-money and illiquid stock-option positions near expiry and runs square-off-only behaviour where appropriate. This article explains the margin ramp day by day, why the blocks exist, and how to avoid both.

STT on options exercise

Sun, 21 Jun 2026 00:00:00 +0000

Overview

Securities transaction tax on options exercise is the central-government levy charged when an in-the-money option is settled at expiry rather than sold in the market, computed at 0.15 per cent of the intrinsic, or settlement, value of the exercised quantity (Finance Act 2026, effective 1 April 2026; previously 0.125 per cent). It is collected at source by the exchange under the Finance (No. 2) Act 2004 and passed through on the contract note. The defining feature is the base: an exercised option is taxed on intrinsic value, while an option sold to close is taxed at 0.15 per cent of premium on the sell side. Those two bases can differ by an order of magnitude.

What happens to unsquared options at expiry

Sun, 21 Jun 2026 00:00:00 +0000

When an option is left open at expiry, unsquared options are resolved automatically by the exchange according to their moneyness and their underlying. An out-of-the-money option lapses worthless; an in-the-money index option is auto-exercised and cash-settled against the index close; an in-the-money single-stock option is auto-exercised into compulsory physical delivery of the underlying shares at the strike. The framework is set by the Securities and Exchange Board of India and the clearing corporations, and on Zerodha it plays out through Kite and the back-office settlement process.

Options exercise charges at Zerodha

Fri, 19 Jun 2026 00:00:00 +0000

Overview

Options exercise charges are the statutory levies and broker costs that apply when an in-the-money option position is settled at expiry on Zerodha rather than squared off in the market beforehand. The defining cost is securities transaction tax (STT) at 0.15 per cent of the intrinsic, or settlement, value of the exercised quantity, charged on the exercised contracts as recorded on the contract note (Zerodha charges page, as of 19 June 2026). This is a different and usually larger bill than the 0.15 per cent STT on premium that a trader pays when selling the same option to close.

Delivery margin field on Kite

Wed, 20 May 2026 00:00:00 +0000

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).

How to avoid physical settlement (manual close-out)

Tue, 12 May 2026 00:00:00 +0000

Physical settlement of in-the-money stock options and stock futures on NSE, mandated by SEBI since 2018, creates share delivery and receipt obligations that most retail traders do not want. The practical alternative is to manually close out the position before expiry. This guide explains the close-out deadline, the cost advantage of closing before settlement, and the exact steps to exit cleanly.

For a full explanation of what happens if you allow physical settlement to proceed, see How to physically settle an in-the-money option .

How to physically settle an in-the-money option

Tue, 12 May 2026 00:00:00 +0000

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.