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Physical Settlement in stock derivatives


NSE announces 46 stocks for physical settlement of stock derivatives.

Here is circular with list of stocks.
https://www.nseindia.com/content/circulars/FAOP37594.pdf

Next import question, how does it is going to impact derivative traders.

Remember it is going to impact both stock futures and stock options trading.

We foresees following impacts:
1.  Liquidity of stock futures and stock options will dry up further.

2.  Most derivative traders may end up trading only Index options and futures.

3.  It may increased BID-ASK spread in stock derivatives.

4.  You may end up paying higher tax and brokerage. It may impact TAX declaration. And in future, based on ITR filing, you may be allowed to trade derivatives.

5.  This may end up switching to Dabba trading for few. (We highly discourage dabba trading)


Our advise:
1.  Only trade highly liquid Stock derivatives, if overall OI is more than 10 lakhs or higher.

2. Keep position size as small as possible.

3. Avoid initiating new stock derivative trades in last week of expiry for current series, as you may not get opportunity to square-off your position.

4. Close your positions as early as possible. Don't wait for last week to square-off your position.

5.  Avoid trading Deep ITM options.

6.  In case if your positions goes in Deep ITM, try to close on first opportunity itself. You may end up breakeven or minor loss.

7.  If you have capital of more than 5 lakh, then only trade stock derivatives. If you end up in assignment (physical settlement), then you may even end up paying more than 5 lakh to take delivery.






Santosh Kumar Pasi, Options Trader and Trainer: Physical Settlement in stock derivatives

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