How derivatives are settled
Gone are the days when derivatives contracts were settled in cash. As mandated by the Securities and Exchange Board of India, derivative contracts have been physically settled since October 2019. This means if you hold a long position in a futures contract on a stock at expiry, you must receive the underlying stock.
Similarly, if you hold short futures on a stock, you should deliver that stock to the counterparty, i.e., the futures buyer. The settlement price is the closing price of the underlying on the expiry date. Example: You bought a futures contract of stock A at ₹100 which expires at ₹120 (settlement price). Assuming the lot size is 1,000 shares, you will be charged ₹1.2 lakh and 1,000 shares of stock A will be credited to your demat account upon expiry. For example, while you initiated the futures contract with a margin of 15 percent, i.e. ₹15,000, you should ensure that a margin of ₹1.2 lakh is maintained if you wish to accept delivery. Insufficient margin amount may incur interest or penalties depending on the broker you have the Demat account with.
If you have shorted futures, the futures seller must deliver the shares to the futures buyer. Scarcity or unavailability of Shares will result in a penalty. The same applies to in-the-money (ITM) options contracts. At-the-money (ATM) and out-of-the-money (OTM) options become worthless and physical settlement does not apply to them. For options, the settlement price is the exercise price. The buyer of the call option takes the stock, while the seller of this option must deliver the stock. In put options, the buyer delivers the stock while the seller should buy the stock.
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