What are Kotak securities policy on physical settlement of equity derivatives on expiry?

• As per the SEBI circular, starting October 2019, it is mandatory for all Stock Futures and Options to be physically settled.

• Index Futures and Options will be cash-settled. Physical settlements will be applicable only for Stock Futures and In-The-Money Stock Options.

• If a trader has an open position in Stock Future or In-The-Money Stock Option that has not been squared off on the expiry date, the contract will be physically settled.

Cash settlement vs Physical settlement

• Cash Settlement: A settlement method used in index Futures and Options contracts where, upon expiration, the trader of the financial instrument does not give/take the delivery of the underlying asset, instead, transfers/receives the net profit/loss in cash.

• Physical Settlement: A settlement method used for all eligible stock F&O contracts at expiry. The user is required to give/take delivery of the underlying asset depending on the position created.

Positions under Physical Settlement

Take Delivery/ Give Delivery:

• Take delivery - The client must take the delivery of shares by paying a margin as per Kotak Securities policy.
• Give delivery - The client must give away the shares held in the Demat account. The client must have the total quantity of the lot size in the Demat, to give away delivery.

In-The-Money (ITM) Call And Put Options:

• ITM Call Option:

A call Option is In-The-Money if the spot price of the underlying is above the strike price. Example: Reliance Industries’ spot is trading at 2500. All the strikes below 2500, i.e. 2480, 2460, 2440, etc. are ITM call Options.

• ITM Put Option:

A put Option is In-The-Money if the spot price of the underlying is below the strike price. Example: Reliance Industries’ spot is trading at 2300. All the strikes above 2300 i.e. 2320, 2340, 2360, etc. are ITM put Options.

Close-To-The-Money (CTM) Call And Put Options:

Close to the money (CTM) strikes are 3 strikes that are immediately above/below the settlement price on the day of expiry.

• CTM Call Options:

The 3 ITM (In the money) call Option strikes immediately below the final settlement price and will be considered as ‘CTM’ for call Options. Example: Reliance spot price – 2566. CTM call Options – 2560, 2540, 2520.

• CTM Put Options:

The 3 ITM (In the money) put Option strikes immediately above the final settlement price and will be considered as ‘CTM’ for put Options. Example: Reliance spot price – 2566. CTM put Options – 2580, 2600, 2620.

Margin Requirement For Physical Settlement In Stock Options And Futures

In line with The Exchange guidelines, our Risk Management Team has the following policy on physical delivery settlement & margin requirements on Option stock contracts:

1. Long Options:

When the client takes a long position, he/she has to only pay the premium to buy the call or put Option (LTP of the contract * Lot size). As the expiry comes near, additional margin is required in case of long ITM positions. The process of additional margin requirement starts from E-4 days, where ‘E’ stands for ‘Expiry Day.’ Please refer to the table below and the example for the requirement of additional margin in long ITM positions:

Example:

Assuming 22% (VAR+ ELM + Adhoc margins) is required for Reliance Industries.

VAR = 15, ELM = 5, Adhoc = 20

22% (VAR + ELM + Adhoc) = 1,65,000 (7,50,000 * 22%)

2. Short Options / Long Futures / Short Futures -

Exchange margin is required to create a long and short position in Futures and short positions in Options. The client needs to make sure that he/she maintains the margin required.

Margin Shortfall

• When there is a requirement for additional margin in any of the positions, the system will block the margin required from the total limits available.

• If the user fails to meet the margin required, the position will then be squared off by the system as per RMS policy.

• The client may increase the limits by bringing in more cash or by pledging the shares/Mutual Funds as collateral.

• Click here to check the collateral margin available on different stocks.

OTM (Out-The-Money) Call And Put Options:

• OTM Call Option:

A call Option is Out-The-Money if the spot price of the underlying is below the strike price.

Example: Reliance Industries’ spot is trading at 2500. All the strikes above 2500 i.e. 2520, 2540, 2560, etc. are OTM call Options.

• OTM Put Option:

A put Option is Out-The-Money if the spot price of the underlying is above the strike price. Example: Reliance Industries’ spot is trading at 2300. All the strikes below 2300 i.e. 2280, 2260, 2240, etc. are OTM put Options.

• Delivery margins are not required for OTM Options.

• Physical delivery is not applicable if the stock Option expires OTM.

• The underlying stock price may change drastically in any direction during the expiry week, converting a few buy positions of OTM strikes into ITM strikes, due to which there will be a requirement for delivery margin.

• The delivery margin required may differ depending on the day the strike becomes ITM.

• If the delivery margin requirement is not met, the system will square off your position because of margin shortfall as per RMS policy.