Module 4   Futures TradingChapter 13

Quick Note on Physical Settlement

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13.1 – Overview

Until recent times, trading in equity futures and options was cash settled in India. What this means is that upon expiry of the contract, buyers or sellers had to settle their position in cash without having to take delivery of the underlying security. On April 11, 2018, SEBI released a circular making physical delivery of stocks for all stock F&O contracts mandatory in a phased manner. The aim was to curb excessive speculation which would result in too much volatility in individual stocks.

13.2 What is Physical Settlement? 

It means all stock F&O contracts at expiry, are required to be given/taken delivery of the underlying security. From October 2019’s expiry, all stock F&O contracts are compulsorily settled physically. 

Let’s understand this with an example, before the introduction of physical settlement, if you bought only a lot of SBI futures expiring this month, on expiry, the contract will be cash-settled based on the settlement price and you will receive the credit or debit in your trading account. We’ve explained how marked to market settlement works in this chapter. But with the physical settlement, if you don’t close or rollover your position till expiry, you are required to pay the total contract and you will receive the delivery of shares to your Demat account.

13.3 Why is Physical Settlement enforced?

When the contract is cash-settled, traders only are required to maintain the margin(SPAN +Exposure) for the contract and can lead to short-sellers building up excessive short positions closer to expiry artificially bringing down the price. With the physical settlement, these traders will have to buy the stock from the equity market or borrow on the SLB markets to be able to deliver the stocks to the counterparty. This brings in balance to the price not allowing for price manipulation.

13.4 How are positions settled?

On expiry, various F&O contracts are settled in the following manner

  1. Take Delivery(stocks are delivered to your Demat account)- Long Futures, long ITM Call and short ITM Put
  2. Give Delivery(you are required to deliver the stocks to the exchange)- Short Futures, short ITM Call and long ITM Put. 

Only ITM options will be physically settled, if the option expires OTM, they expire worthlessly and there won’t be any delivery obligation. 

13.5 Netted off positions(subcategory)

If you have multiple positions of the same underlying for the same expiration date and they form a hedge, depending on the direction of the trade, they will be netted off.

1st Leg 2nd Leg
Long Futures Short ITM Call

Long ITM Put

Short Futures Long ITM Call

Short ITM Put

Long ITM Call Long ITM Put

Short ITM Call

Long ITM Put Long ITM Call

Short ITM Put

Short ITM Call Long ITM Call

Short ITM Put

Short ITM Put Short ITM Call

Long ITM Put

For example, if you have an SBI June long futures contract and long ITM Put of strike 200(SBI spot price at Rs 180), the long futures position will lead to a take delivery obligation and the long put option to a given delivery obligation. This will be netted off for your account and there won’t be any physical delivery obligation.

13.6 Margins

When you are trading in the F&O segment, for futures and short options, you will require to maintain only the margin amount in your account, for long options, just the premium required to buy. However, this changes with the physical settlement mechanism, where you are required to bring in 100% of the contract value to take delivery of the contract or bring in stocks to give delivery(depending on the direction of your trade). Brokers introduce additional margins when such positions get closer to expiry. 

You can read on Zerodha’s physical settlement policy here.


  1. Ravindran S says:

    Your detailed guidelines (Zerodha Varasity) with illustrations on Futures is one of the best presentation that I have seen. It has enlightened me on Futures. I shall thank you to clarify the following doubt:
    From NSEindia website I find the following data against ICICI Bank Futures:
    Date Stock Expiry Volume Open Int Change % Change Historical data
    (contracts) contracts in OI in OI Volume Open Interest Change in OI
    ———– ———— ———— ———— ———- ———— ———– ———— —————– —————-
    (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
    19.06.20 ICICI Bank 25.06.20 55,721 66044 -14243 -17.74 7,66,16,375 9,08,10,500 -1,95,84,124
    Doubts: 1. What is the difference between Col 4 and 8 and between Col 5 and 9
    2. How do you arrive each day closing Open interest figures (Col 9) from OI contract traded (Col 5)

    S. Ravindran

    • Karthik Rangappa says:

      Thanks Ravindran,

      1) Volume is the total volume traded for the day. % CHange is the change in OI wrt to y’day’s value. I’m not sure about 5 and 9, because I’m unable to read it properly. Can you state that explicitly?

      2) This is an exchange process, they compute and publish the data.

  2. Krishant Sethia says:

    Is physical settlement required only when someone keeps the futures positions open until expiry or it is required even if one closes his positions 2-3 days before the expiry?

  3. Krishant says:

    This course on futures (all the other courses for the matter) are one of the most comprehensive free courses available. The content is just awesome and one can clear doubts easily ,provided the comment section.
    Thank you so much Karthik Sir (and the varsity team) for the efforts to produce such content.

  4. Vaishakh says:

    Hii Karthik sir,
    I have a slight doubt, Since these days its ‘Unlock 1.0’ and the stock market is bullish and people have positive sentiments towards market.
    1) What will be the scenario when the companies release their 1st quarter result in the month of july/august.
    2) If the bulls hit a reality wall of Earnings, (which they will probably face once Q1 earnings are out) how strong that event will be ? I meant, will we be able to see stock downtrend or overall market downtrend ?

    • Karthik Rangappa says:

      1) From whatever reports that are available on the public domain, it appears that most of these companies are expected to report bad quarter
      2) The market has factored in not just this quarter but couple of more quarters Vaishakh.

  5. Arnav says:

    Hi Sir,

    What if someone who has held the long (for example long futures of RIL) position till last day and is unable to square off his position due to liquidity?

    Will they also be settled through physical delivery.

    And what if do not have sufficient funds to take the physical delivery in case of long futures.

    • Karthik Rangappa says:

      Yes, Arnav, it will be settled physically. The position will be closed in case you dont have the necessary margins leading up to expiry.

  6. gunanidhi says:

    And as physical settlements is only for itm’s right . And one thing sir Mr.Karthik Rangappa , your curatives are just awsome on stock market . Thank you sooo much sir.

  7. nicemon says:

    Karthik sir, what is the procedure for excercising the settlement , will it automatically converted to delivery of stocks ? what if we hold the position till expiry and we don’t have enough margin to buy the stocks ?

    • Karthik Rangappa says:

      Thats right, the settlement will happen based on the stocks or cash available in your account. Btw, you need to have the stock or cash in your account (based on your position) before expiry, else the position will be closed.

  8. Siddharth says:

    Hi, I have multiple doubts and I think I can best illustrate them with an example. Suppose I buy Futures of underlying A worth 1000, lot size 100, with SPAN+exposure=10%. Hence to buy this contract I need 10k as initial margin in my account. Now assuming the price stays constant, and we reach the Wednesday before expiry. I read Zerodha’s policy and correct me if I’m wrong but it said that I need to have double the margin on this day.
    Q1 – If I don’t add another 10k to my account(by Wednesday 3:30pm), will my position be closed or will it remain open but I’ll be charged a penalty?
    Now assuming I add the 10k and now we reach the final day. I read in the comments above that my position will be closed if I don’t have enough money to get delivery.
    Q2 – So this means that at 3:20pm on Thursday, the system will check if I added the remaining 80k, and if I haven’t, it will automatically square off my long position, is that correct?
    Q3 – If what I assumed above was correct, then essentially there isn’t much change after the policy change from cash to physical settlement right? Apart from the double margin two days before expiry. Basically the Zerodha system takes care of settlement and I need not worry about having the total amount?
    Q4 – If this entire position was short instead of long, at 3:20 pm the system will check if I have enough of A to deliver, and if I don’t, it will square off the position, hence protecting me from short delivery. Is that right too?

    • Hi Siddharth,
      1. Our RMS team will close the position anytime on Wednesday or Thursday if there is a shortfall of margin(2 times SPAN+Exposure). No, penalty will only be charged if the SPAN +Exposure margin is not maintained.

      2. As long as you maintain 2 times the normal SPAN +Exposure margin, we will allow you to carry the position to expiry. If the position results in a physical settlement(futures and ITM options), 100% of the contract value will be blocked.

      3. Yes, while it is simple for take delivery positions(long futures, buy call and short put), for give delivery positions, you need to deliver the stocks to the counterparty. If you dont hold the stocks in your demat, this will lead to short delivery.

      4. No, as long as you hold the additional margin in your account, we will allow the position to expiry.

  9. Madhav Kumar says:

    Hey Karthik,
    I had a small query. So, in the case of physical delivery. Let’s say i have a long future or long ITM call option. If at expiry, if there are no sellers of the physical stock in the market, then what happens?

  10. Chetan says:

    I would like to know what happens if I do not square of my positions on expiry. This is with respect to index options only (NIFTY & BANKNIFTY). Could you briefly explain this with respect to an option buyer and an option seller.

  11. Shadab Hussain says:

    This chapter is not available in Hindi language


    Dear Karthik Rangappa Sir, May god bless u with all the happiness in ur life. Lakhs of people’s wishes, blessings are with u Sir. Wishes, Blessings never go in vain for a selfless service.

  13. Jeetendra Singh says:

    Dear sir,
    If i buy a stock future of august expiry in mid july , then can i bring my postion until august expiry or i am to squared off my position before july expiry.
    Thank you

  14. Nikhil says:

    well explained!

  15. Riyansh Mukeshkumar Mehta says:

    Having bought a future contract of current month and shorting a contract of mid month
    And suppose I don’t close my future contract will I have to physically settle my contract by buying the shares ?

  16. Gaurav says:

    Hello sir
    Sir i want to know if i bought future of PFC @ 82 aug month and sell CE 85 @ aug 3.50… What will happen if PFC crosses 90 at expiry.. And what if goes 75 at expiry….

    • Karthik Rangappa says:

      YOu will make 8 Rupees on Futures and lose 1.5 on options at 90. Btw, you can use Sensibull to see the payoff for these strategies.

  17. Skopje says:

    Hi Karthik

    So this physical settlement comes into picture only if we don’t close the positions by expiry? Otherwise, we exit and cash settle?


  18. Sudhan G S says:

    Hello Karthik,

    The module has been of great knowledge. I can’t thank you enough.

    Let us assume a company’s 100% of the issued shares has been bought and held in the spot market.

    In such case, how the company will be able to deliver the shares (without any additional shares to offer) during the expiry of a futures contract?


    • Karthik Rangappa says:

      The thing is that if its bought, and held to expiry, then the seller has to deliver, failing which he has to pay the penalty. So there is no option.

  19. Aditya says:

    Even when I have the stocks (say bajaj finance – 250 shares) and If I have OTM sell call option and I am willing to sell them if the OTM become ITM. Do I still need to maintain the margin required in cash?

  20. Surya N. Parija says:

    Sir suppose on the day of expiry if I dont have the required amount for taking the delivery of stocks then what is going to happen. Will it not be cash settled if I intend to close my position on expiry day before 3:30 pm.

  21. cody says:

    Hi there are few mistakes please correct them un “How are positions settled?”

    Point1: Take Delivery(stocks are delivered to your Demat account)- Long Futures, long ITM Call and short ITM Put.
    Correction: Here you meant whatever we bought we must get physical shares in our demal. so it shouldn’t be “short ITM Put” it should be “long ITM Put” because we never get delivery of short selling. this should come under 2nd point which is “Give delivery”. As a buyer we never sort.

    Point2: 2. Give Delivery(you are required to deliver the stocks to the exchange)- Short Futures, short ITM Call and long ITM Put.
    Correction: It shouldn’t be “long ITM Put” it should be “short ITM Put”. As a seller we never long we always short.

  22. cody says:

    i wonder why nobody observed this. it wasted my half an hour and confused me for some time.

  23. Vinayak says:

    If I am short on futures contract and I want to avoid giving delivery obligation, as a rule of thumb, till what time should I keep my positions open? As I suspect the contract might become illiquid as it nears expiry, can you explain when to close the position to avoid delivery obligations?

    Thanks and Regards

    • Karthik Rangappa says:

      If its illiquid, then its best to sell when you get an opportunity and not really wait for expiry, since expiry leads to physical settlement and you mentioned you dont want to deal with that.

  24. Rishab says:

    Hi Karthik,

    Another chapter beautifully explained. Kudos!

    Few questions,

    1) As you had mentioned you said that you will introduce us with few strategies wrt Futures mid chapter, please post few just like you did for Option series.

    2) I tried Zerodha terminal and it not that user friendly, will there be a simplified version of it anytime soon? Cuz the web-based Kite is amazing but there are some limitations to it.

  25. chenappa says:

    Hi karthik,

    what happens if we do not square off nifty future contract on the day of expiry ? and how will it be settled ?

  26. Rishabh Gupta says:

    Hello sir,
    I am just a novice in futures and have a bunch of doubts in my mind
    Suppose I bought a future contract worth 10,00,000 with the 20% margin required( i.e. 2,00,000) in my account and I wish to keep it till expiry.
    1) Does that mean at the time of expiry I must have 10,00,000 in my account?
    2) If so what will happen if I don’t have sufficient fund(i.e. 10,00,000) at the time of expiry?

    Also if i understood it correctly,
    3) if i keep the above mentioned future contract till expiry i will get the delivery of those shares right? so does that mean i will be able to sell them as i wish afterwards?

    • Karthik Rangappa says:

      1) Yes, owing to physical delivery
      2) The position will be closed by the broker in the absence of the funds
      3) Thats right.

  27. Rishabh Gupta says:

    Thank you so much Karthik sir,
    I will graduate college this year and wanted to enter the stock market and varsity really helped me with it.
    Honestly so far I have not seen a better teacher than you.
    Also thanks a lot to your team.

  28. Rishi says:

    Hey Karthik!
    First of all thank you for providing us with such great modules on futures!
    However, I have some doubts and would be grateful if you could answer them:
    1) In case of an auction, if the broker profits because of a reduction in the stocks price on the auction day, then will it share the profit with the client or it wont do so and just charge the client a particular percentage of the entire value?
    2) Is there an option to choose between physical delivery and cash settlement on the expiry date or it is mandatory to engage in physical delivery in case of :
    a) Equity market
    b) Commodity Market
    3) In case a person shorts futures (wrt the compulsory physical settlement on expiry) then the market will square off its position on expiry or will it ask the person to deliver the shares)
    4) What happens in case a person fails to pay the necessary amount at the time of expiry in case of futures, like what are the penalties?

    • Karthik Rangappa says:

      1) There is no concept of broker profiting, whatever P&L will be attributed to the client
      2) For stocks, its mandatory physical settlement. Commodities – depends on the commodity. But its either physical or cash, no option to choose from
      3) If the short is held to delivery, then yes, you are required to give shares
      4) That situation won’t arise since margins go higher leading to expiry.

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