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
- Take Delivery(stocks are delivered to your Demat account)- Long Futures, long ITM Call and short ITM Put
- 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.
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
21.06.20
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.
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?
Only if you keep this to expiry, Krishant.
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.
Thanks, Krishant. I hope you will continue to enjoy this.
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 ?
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.
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.
Yes, Arnav, it will be settled physically. The position will be closed in case you dont have the necessary margins leading up to expiry.
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.
Thanks for the kind words 🙂
Yes, the physical settlement is for ITM options.
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 ?
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.
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.
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?
Not possible, there is always someone at the other end of the trade, hence will be settled.
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.
For both buyer and seller, the trade will be settled by the exchanges.
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.
Thanks for the kind words, Veeranna. Your words made my day 🙂
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
You can hold the position till the end of August expiry.
well explained!
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 ?
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….
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.
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?
Thanks.
Thats right.
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?
Thanks
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.
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?
Yes, thats required.
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.
The broker’s system will not let you carry forward the position without the necessary margins.
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.
I think you’ve confused yourself. Please do read up on the basics again.
i wonder why nobody observed this. it wasted my half an hour and confused me for some time.
Hi
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
Vinayak
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.
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.
This chapter is by a colleague of mine 🙂
1) Do check this – https://zerodha.com/varsity/module/trading-systems/
2) Kite is simply amazing, not sure about the limitations you are talking about. Can you please point that out?
Hi karthik,
what happens if we do not square off nifty future contract on the day of expiry ? and how will it be settled ?
The contract will cease to exist upon expiry, hence it will be cash settled.
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?
1) Yes, owing to physical delivery
2) The position will be closed by the broker in the absence of the funds
3) Thats right.
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.
Happy to note that Rishabh. Hope you continue to enjoy reading Varsity 🙂
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?
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.
Hi Karthik, Lets say have a ITM short call option at 2300 strike for RIL stock and to hedge it now i have bought a future long at 2310. RIL closes at 2330 at expiry. What will be the scenario- payoff/penalties etc, if you can please illustrate? Will be a great help.
Just adding a bit of my understanding here based on above section :-
1. No physical delivery on either leg. Right? So dont need capital to buy shares or stocks to sell shares?
2. What if the option buyer of call option does not execute his buy option? If that is possible, cannot a future buyer or short do the same?
3. Brokerage on Zerodha side?
4. Any other penalties or charges that we should be aware off?
5. What will you recommend in the situation where you feel your OTM option will become ITM, should you roll it away or hedge it using futures?
Thanks!
1) Yes, short ITM CE is offset with long Futures, hence, no physical delivery
2) The buyer has an option not to exercise if its a close to money option, not on ITM. ITM has to be exercised
3) 20 for each executed trade
4) No
5) Depends on your P&L objective. If you’ve hit the P&L target, you are better off to close the position.
Awesome thanks! finally an authoritative answer, had been going in a circle with Zerodha support.
So Kartik, https://tradingqna.com/t/what-are-close-to-money-contracts/42989 here CTM is being defined as 3 strikes below final settlement price, in case of a call option while 3 strikes above final settlement price, in case of a put option.
What is the final settlement price here? underlying stock closing price on expiry day?
For example for Reliance has 12.5 price point difference between 2 strikes.
so if i am 2300 short call, 2310 future long, and the market closes at 2330 ( so 2300 is 2 strike below final price) will this option qualify as CTM?
Also do we have this option with futures? Or that has to be mandatorily physically settled?
Hi Karthik,
When I see on the NSE website on the following link I do not see the requirement of Physical settlement. Why is it so?
https://www1.nseindia.com/products/content/derivatives/equities/settlement_mechanism.htm
What exactly are you looking for, Arjun?
hello Karthik,
What happens in case of physical settlement of Nifty futures?
Nifty futures does not have physical settlement.
I HAVE 2 QUESTIONS
1. What is the use of exposure margin if everything is about span margin ?
2. A trader short 1 lot of sbi at rs 250( lot size 3000 ) with an initial margin of rs 100000 ( Span – 60000 & Exposure -40000 ) . And during the day STOCK moves 20% up & broker decide to square off due to marginal short fall . I want to know what will be the loss & how it’s calculated ? ( ITS A VARSITY APP FUTURE CERTIFICATE QUESTION )
1) To maintain enough buffer for SPAN 🙂
2) Loss will be 20% of 250 i.e 50 * lot size so 50 * 3000 =15K.
50*3000=150k same 150k is answer in varsity app . But initial margin was of 100k and above that there will be a MARGINAL CALL . And if trader doesn’t want to pay the marginal amount the contract will be square off by broker itself. So it’s upto the trader that he wanna bear the loss of another 50k or not . Correct me if I am wrong
Thats right Ayush. As long as you have the margins the broker will allow you to initiate the position.
Thank you for the valueable information.
I have 2 questions.
What are the probable ways for finding Gap up and Gap down openings? How can one find such opportunities?
Can you please share more on future trading strategies?
Find gaps ups/down as in before it happens or on the chart? Its not possible to identify these before it happens 🙂
Hi Karthik ,
I just saw reliance share. It shows increase OI for future & decrease in OI for option and underlying price is decreasing. Both F&O are of same expiry of 29 Oct . With reference to your OI & TRADER PERCEPTION TABLE . I am little bit confused that what does it imply
Options have so many strikes, so is natural for OI to increase or decreases across CE and PE right?
Sir, during the expiry day which is going to be tomorrow, the markets remain volatile(meaning that the markets will have a sudden change for the worse) or is it that the prices may even move up? What is the reason for the above?
What happens on expiry is anybody’s guess, hard to predict 🙂
I have a few queries relating to the stop loss and trailing stop loss mechanism
stop loss
Is the stop loss 9taht has to be plugged in while placing an order) an absolute number at which the security is to be sold or is it a margin amount relative to the purchase price
for eg if i place a buy order @ say 1900 and i wish to have a stop loss margin of say rs 100 Should i plug in the stop loss as 100 or as 1800
Trailing stop loss
is this in terms of money or in terms of ticks
It has to be the price.
Hi
Why is it that the platform does not have a facility of placing a trailing stop loss on CNC orders. This is a pretty standard feature and is it because of issues with the systems @ NSE. If that be the case this issue ought to be taken up by the brokers association with NSE as this happens to be a cornerstone of RM.
We do have this feature, check this – https://zerodha.com/z-connect/tradezerodha/kite/introducing-gtt-good-till-triggered-orders
Hi Karthik,
Few questions.
1. What is ITM? this came out of blue which was not mentioned anywhere in earlier chapters as well.
The concept of physical settlement is not clear even after reading comments too, let me brief you.
2. On expiry day, If I had owned a contract and I don’t have 2x margin then Zerodha will square off position without charges?
3. On expiry day, If I had owned a contract and I have 2x margin then Zerodha will hold my position? What happens next since I only have 2x margin but I don’t have total amount to buy the underlying on the expiry day?
4. Basically physical settlement is to curb last minute short sellers who inflate prices, does it mean on expiry day if I try to buy the contract at 11 AM should I pay whole amount? How exactly inflation of prices are stopped?
Sir, is there any method where I could stay shorted in the market for a period of 1-2 years?
Nope.
Sir thanks for the course i have a question regarding futures suppose i bought a future contract of ongc @90 of mid month which is at 3.57 lakh and for any reason price fall but im confident that price will bounce back
At the time my loss is 50k so do i need to have this extra 50 k in my account or only buying value of contract is blocked
Adil, at any point, you need to have the margins required to hold the futures position i.e SPAN + Exposure.
Can you please explain why there is huge difference in spot and future price of Canara Bank, also what can we expect at expiry? And why open interest is not coming down even when it’s in ban period.
These are due to market dynamics, Manjunath.
Sir,
I bought IOC 105 dec CE- 3 lots at 0.95 now it’s LTP at 0.05.
1 lot automatically closed and got this msg :
We see that you have an open F&O position in a contract with compulsory physical delivery. Please ensure you have sufficient margins/stocks to avoid your position being squared off. Read our policy on compulsory physical delivery
I’m not able to sell due to lower circuit, tmrw is expiry and I’m not having enough amount in account. I feel I’m stuck.
What should I do, please support.
Can you please call the support desk for this?
Also I already bought IOC 105 Jan- 1 lot, if I add 2 more lots will this helps to skip physical settlement.
Depends on how these options expire and net off each other.
Hi
I had bought futures 1 lot of LT@ 1324 and on expiry it closed at 1287. I had planned to take physical delivery on expiry. I had to enough funds to the tune of the contract value itself through out the period. Now I notice that the futures loss of approximately 20000 has been booked to my account. How is that possible? I am taking delivery of the stock with the funds available in my account at all times. Can you please explain this.
Thanks
The loss is attributable to the daily M2M. The same would have happened if you had made a profit right?
Thanks Karthik, I am learning by by experience. In such a condition when the market goes against you and you want to hold on for a longer term, is it better to rollover the position or to go in for settlement. Why does ZERODHA not have a rollover option button? Wouldn’t it be more user-friendly for traders?
Thanks
Rollover option would be an algo, which is not allowed for retail.
You haven’t answered my earlier question as to which would be a a better option. Rollover or physical settlement in terms of cost.
” Rollover option would be an algo, which is not allowed for retail”
I did not quite understand that. How do retailers perform a rollover then? Did you mean ” an automatic rollover button” is not allowed for retailers?
Thanks
Girimon, sorry missed that bit. It is better to rollover if you can. To rollover, on expiry day, you need to square off the current month contract, and then initiate the same position, same quantity, in the next month’s contract.
Hi
Great content. When I download the PDF for the Futures module, it is not clear. Some lines are getting displaced, images etc. For example on page 24/131 the top line and bottom is missing. This page contains info from section 3.2 to 3.3.
I think other pages also have similar problems. Can you please upload a correct version?
Checking on this.
Another place this error occurs in section 7.5 (can’t see the page number) trailing stop loss. Also occurs on the next page.
The first line is only partially readable. It occurs in other places too but this came to my mind as I am reading this page currently.
Also could you please update the taxation module? Somethings like tax slabs are out of date, I think.
Will check the taxation module and update it. Thanks for pointing the error, will take a look.
Hi
When you update the taxation module can you please reply yes to this comment thread?
Another suggestion is in your pdf files you can mention something like “Last updated on : 12/2/2021” . This way, we can have an idea of how recent the pdf file is.
Thanks
Noted on both.
suppose A enters into a future contract with B under physical settlement system with expiry date 23rd dec. Can A square off around 20 dec?
If yes, A squares off and sells the future contract to C, will C buy the stocks from B on 23rd dec or 1 month after 20th dec?
Yes, anyone can square off before the expiry of the contract, no need to wait till expiry.
Dear Karthik,
I have a couple of question which I hope you can answer.
1) Since Index derivatives (Nifty/Fin Nifty/Bank Nifty) are cash settled, will my margin requirements for each of them increase during the last few days of expiry?
2) Just call equity, is there a way we can place orders on derivatives after hours? Like I can place an order to buy HDFC bank current month futures at 12 am?
3) Can you also explain post hours trading in the NSE where you can still sell your shares post 3:30 pm?
1) Yes, margins do increase as we approach expiry
2) Yes, you can place an AMO
3) There is no trading post 3:30. However, you can buy/sell at the closing price between 3:40 to 4 PM.
Dear Karthik,
1) Why would the margins increase for Nifty/BankNifty/FinNifty if they are cash settled?
2) How do I place an AMO for derivatives? Aren’t AMOS only for cash limit orders?
3) How do i buy and sell after the closing price?
Sorry for the trouble.
1) My bad, margins dont increase for index contracts. In fact, it reduces if you have a hedged position
2) You can place AMO for all contracts, check this – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/others/articles/what-is-amo-and-when-can-we-place-it
3) After the closing price, meaning?
Dear Sir,
I mean after closing bell at 3:30 pm.
how can i continue to trade till 4 pm?
There is a small window open between 3:40 to 4PM, wherein you can buy and sell at the closing price. I was referring to that.
Dear Sir,
Is there a reason why companies like HDFC sec do not allow AMO for F/O contracts?
Not sure, just their internal risk policy I suppose.
Dear Sir,
How should I place an order for 3:30 to 4:00.
Or is that during the settlement time if I have an existing order it can get cleared during 3:30 to 4:00 pm?
YOu can do it via Kite. Observe how it works on Kite for a day or 2 and then you are good to go 🙂
So if I am under profit and I did not settle my position until expiry, then what amount should I pay? Can you please explain with an example?
BAsed on the position that you have, you either need to take or give delivery of the shares.
Suppose I have purchased one SBI futures contract. I did not settle before expiry and I am under profit. Now, shares are trading at say 400/- and SBI futures lot size is 3000. So, will I have to pay
1. 3000*400 = ₹12,00,000 ?
2. What if I don’t have 12 lakhs in hand?
Thats right. If you don’t have the margins, the position will be closed by the broker before the expiry of the contract.
Hi Karthik
Is the taxation module up to date?
Hello Sir.
I completed reading Module 4 on Futures trading and now i am sooo much mesmerised with it so i want to continue with its strategy so that i can delve more.
But the next module is in Option theory and then the option strategy..
In which module there is strategy for the Future trading? Is it to be done something with Module 10, Trading system, so then i can start reading that module.
Thanks in advance
Happy to note that, Saurabh. At this point, I’d suggest you experiment and gain some experience trading naked future positions i.e. long and short futures. You can do a paper trade as well. Once you gain some confidence, I’d suggest you explore calendar spreads and pair trading. Have discussed these in the module on trading systems.
Suppose my position is not squared off till expiry, and i do not have the amount to take delivery of the shares, in that case what will happen exactly, judging from your reply, i guess 2 or 3 days before expiry broker asks for extra margin, and since we do not have such a big amount for delivery , broker will square off our position, and we will receive our profit accordingly. Pls explain this, having doubt in this case
Thats right, if there is no margin, then the position will be squared off Sheirsh.
Hi karthik , i wasnt able to grasp the concept of why the shares must be settled physically, could you please elaborate in simple terms with an example please
There were few loopholes using which the market participants were trying to manipulate prices, this got plugged with physical delivery.
But can there be a case where there is no buyer for the broker to square off my position. what will be the situation then.
Yes, that’s possible. In such cases, the order will stay pending.
Hi Karthik, Great content. Thanks for sharing.
1.I have bought eicher future 1 lot. But I’m Running on loss. Do I need to book my loss even if I take a physical delivery by maintaing sufficient margin?
2.What price my delivered shares will be bought at?
3.How to avoid booking loss on expiring future contract?
1) Daily mark to market happens, so if there are losses, this will anyway get settled by EOD
2) The settlement price on the expiry day
3) Not sure 🙂
Dear Sir
Sir I bought reliance Feb 2300ce 4 lot *250= 1000 qty and it’s value today is 0.05 and I couldn’t square off. Share price was 2145 at closing on expiry. Is there will be any charges
Please confirm
Not really, option expires worthlessly, hence you lose the premium paid. No other charges.
First of all thanx 4 ur module…
I have one question, suppose i short sell currency future and at the time of expiry i am in profit but i havn’t square off my position..
Then what will happen? The margin blocked by broker will refund me?
The contract will be settled and the P&L will be settled.
Sir, I have a doubt regarding Physical settlement..What about the physical settlement of index futures since they are not individual stocks? How can they be physically settled?
Rajdeep, index contracts are not physically settled. They are cash-settled.
Sir, what will happen if I don’t square off the future contract of stocks on expiring? And also don’t have the stocks for physical settlement?
The positions will be squared off before expiry in the absence of the required stocks.
Hi,
Suppose I buy a future of XYZ, for 1000 lot size at 100 Rs.
Now at expiry, the price of the stock settles at 90. I want to go for physical settlement. Now at what price shares would be given to me..at 90 or at 100?
And if it’s given at 90, what happens to the 10 rs difference.
Thanks.
It will be at the futures settlement price i.e. 90.
In march 2021 expiry. 1 put option goes in the money… ie icicipru…
My query is when will i can sell icicipru in cash mkt….
On expiry day.
Hi ,
Q1. I’m long on Futures and my position open till expiry and not closed, I have enough fund to take delivery, So now how will it happen? By automatic or do I have to buy myself? And at which price I can take delivery? By spot price or by futures price ?
Q2. I’m short on Futures and my position open till expiry and not closed , here I have 2 cases
Case1 : I have x amount of shares already in my demat. Will it be taken out automatically during physical settlement ??
Case 2: I don’t have any shares but I have sufficient fund. Now what will happen ?
Thanx in advance
1) It will happen automatically. The broker will ensure it’s settled. You just make to ensure you maintain sufficient margins
2) Same as above
Case 1 – Yes
Case 2 – Your position will be closed before expiry
In PDF of Fututres Module, “Quick Note on Physical Settlement” is missing .Pls add it
Sure.
What about M2M? I don’t know why but M2M made sense when contracts were cash settled. In case of physical delivery, how will it be calculated?
In the same way, expect upon expiry, the settlement is physical instead of cash. Nothing changes.
So if I bought a future contract of some underlying asset before 5 days of expiry, every day according to M2M, money will be credited or debited except on the expiry day. On the expiry day, I will have to buy the stock at a price which will be equal to closing price of that stock a day before, right?
Thats right, the final settlement on expiry day, come to think of its, that’s also M2M.
In Why Physical Settlement Enforced:
“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.”
A similar situation will arise for the Buyer also, right? They are forced to Buy the Securities from the Counter Party and give up the cash. Why didn’t emphasised this scenario?
Yes, its applicable to both buyers and seller.
Loved It !!! Thank you.
Good luck and happy learning!
Hello Karthik, great blog. I learned a lot.
What happens if I let my sold (written) Call/Put options expire without buying them back?
This is probably a really basic question, but I haven’t found a definitive answer to it anywhere.
Thats ok, if it expires worthless, then you get to keep the premium. If it has an intrinsic value, then you will have to either take or give delivery owing to physical settlement.
Hi Sir,
I have a doubt as follows:
I understand that if i don’t have enough amount for physical delivery on expiry day the position will be closed by Broker(Zerodha). But is there specific timing up to which i can hold the positions on expiry day. Or i have to ensure to exit a day before.?
You need to ensure you have enough margin amount even before you head to expiry, a few days earlier.
Sir,
Is there any obligation of physical settlement while trading Indices F&O?
Thanks in advance!
No index is cash settled.
U r modules are just awesome
It enlightened my understanding
and driving towards futher exploration
Tq for sharing u r valuable research
Happy reading, Srikanth.
Hello Sir,
Where can I see real time MWPL so I should know whether to enter a derivative position or not?
MWPL is fixed for the day, does not change real-time. OI does, which you can track on Kite/Sensibull.
Hello Sir,
Apart from the NSE website, where can I view MWPL?
So I can know whether I should enter a trade or not
Only NSE publishes this information.
Are nifty futures also physically settled ?
No, its cash settled.
Hello Sir,
1) I have 1350 tata Consumer in my demat account.
I have pledged this amount to gain margin after which I have decided to sell an 820 Call option with July 29 expiry. CMP is 780. (covered Call strategy)
If the expiry price is 830, would the exchange take my delivery of 1350 shares of Tata consumer automatically?
2a) Assuming I have not pledged my shares of 1350 Tata consumer and they lie in my Demat account.
I have decided to sell 1 lot of tata consumer at 820 CE. If the expiry is 835, does the brokerage ask me to deliver my shares or does it take it automatically?
b) Since I hold these shares in my demat account and decided to sell an OTM call. During the last week, will my margins increase? If yes why? I hold the exact amount of shares in my demat account and I will not be able to give a short delivery.
1) Yes, but will have to be unpledged first
2a) Yes
2b) Yes, margins will increase in the last week.
Hello Sir,
Just to follow up
1) I’ve heard HDFC securities automatically takes your delivery and you don’t need to un pledge your stocks again.
2a) Does the brokerage tell me that I am short on delivery or something. Do they call me/email me before hand?
2b) Why does my margin increase even though I have the exact stock in my portfolio.
3) If I have created a simple stock spread position, does the margin increase despite there being a spread position that cancels it self out?
1) Not sure about their risk mgmt practice, we’d prefer if you unpledged this yourself.
2) Yes, but its usually post expiry. Its best if you keep track of your positions
2b & 3) Margins are based on F&O portfolio, spot positions won’t be considered.
Hi Karthik,
Two questions on futures contract:
1. In case of non-Zerodha trading account where the futures contract are cash-settled, when I close my long position at say 3:29 PM, who buys the
“final” futures contract. After all if I am closing my long position by selling it, there should be somebody buying it right? Who is the final buyer?
2. What is the reason for Zerodha’s policy of settlement through delivery if not closed by expiry date/time?
1) It will be another trader who would have shorted. For that trader to close the position, he or she has to buy back right?
2) This is mandated by the regulators, and not really laid out by Zerodha
Thanks for the reply Karthik.
1. You are absolutely right. I forgot the basic fundamentals that Futures trading is through a contract and in a contract, there has to be a buyer and a seller.
2. But in for example Angel, it is cash-settled unless explicitly asked for. If, for example due to some reason I fail to close my futures position by end of expiry day, only the last day’s M2M is further settled – because in any case the previous days’ M2M would have been settled on a daily basis.
One additional question: I found that in the daily M2M settlement, there are a number of statutory taxes levied – I have to pay for example the turnover tax even if my M2M is negative. So can I say that in Futures trading, the overheads are higher?
Thanks and regards
Sathya
2) Yes, daily M2M occurs to ensure default risk is minimized
All charges are applicable either upon a buy or a sell trades, not for M2M.
Hello Sir,
I hope you are doing well.
I have calculated the beta of my 15L portfolio wrt Nifty 50.
The question is, when exactly do I decide to hedge it using Futures or atm/itm put option?
Not sure about this
The decision to hedge depends on how you feel about the market. You hedge when you feel the market will go down/crash. I guess you will develop a strong sense for this as and when you spend time in the market.
Hello Sir,
1) What exactly defines a crash? Nifty moving 1-2%, nifty moving 10% etc?
2) My confusion is that if Nifty usually moves 0.5%-2% on and off. So Do I only deploy future buying or put options then?
Now I have a portfolio of 15L with a beta of 1.2. So i need to purchase and equivalent of 18L of nifty futures correct.
What if I find Future to be risky, I decide to purchase puts.
3) I would need to purchase roughly 18L worth of ATM put options? or Do I purchase ITM or OTM?
1) Depends on your trading time frame. For day traders, 1% is a crash, for long term investors its not. 20% is a crash for swing traders and maybe for the long term investors as well
2) Again, depends on your trading style and the instrument you are comfortable with
3) It does not matter, since you are hedging the portfolio completely. 18L worth of PUTS, measured in terms of the contract value.
Hello Sir,
Consider me a long term investor.
1) Now assuming a 10-15% crash does not happen in one session. It happens over a period of 2-3 days. When exactly should one deploy something like this.
2) I would prefer options but futures are relatively easier sometimes correct? No greeks etc.
It does not matter how many days it will take for the crash, as long you feel that the market crashes you deploy the hedge. Yes, futures is a far easier instrument to understand compared to options.
Hello Sir I hope you are doing well.
Lets assume I bought 9500 IDFC first bank shares at Rs. 61. IDFC first bank has been declining in price to 50 slowly since I bought the share.
I sold 70 CE otm calls when I bought IDFCFirst and pocketed Rs. 1.2.
IDFC has dropped to 50 which means I could have sold a future instead.
1) My question is when I buy such stocks for short term, Should I implement a stop loss or sell a future if it drops or be content by selling a call?
2) Assume I hold the stock on a long term basis. My costing is 61. When exactly do I decide to sell a future? After the stock drops 4-5%? Like I don’t want to implement futures if the stop just move up/down by a small amount.
1) These are 3 different things, Swapnil. But for short term trades, I’d ensure a SL is in place, but if I’d like to hedges, my first preference would be a short future followed by other options
2) This purely depends on your expectation from the stock.
If I go long on TCS buy futures contract (delivery) at 3350 put Stop loss at 3300. Next day due to some bad news TCS opens at 3250. Then in this case how will the settlement take place. Pls help me understand this concept
In that case, the SL would not have triggered. YOu will have to modify the order and sell it at whatever price is available in the market.
Hello Karthik, I went through the entire futures content and its awesome! Appreciate your good work!
Small question regarding the physical settlement. Is physical settlement mandatory even if I am squaring off a contract? or is it only mandatory upon contract expiry?
Glad you liked the content, Praveen. Physical delivery is possible only if you hold to expiry, else it’s not applicable.
Hello Sir,
When the Future price is trading below the spot price what exactly does this signify?
I am confused if this is a bearish or a bullish sign?
It just means that the future is at a discount. All else equal, futures should trade at a premium to spot.
Hello Sir,
If the futures trades at a discount, does that mean that the spot will move towards the future or future would move towards the spot??
What confuses me is that for example Nasdaq futu
It can be either, but the point is that they both will converge to a single price point on expiry.
Hello Sir,
If the futures trades at a discount, does that mean that the spot will move towards the future or future would move towards the spot??
What confuses me is that for example Nasdaq futures if are trading lower than the spot’s previous close or take SGX nifty is trading lower than the previous close.
The spot would follow the same route correct??
It can be either, but the point is that they both will converge to a single price point on expiry.
What is ATM, OTM, ITM in f&o.Does these discussed in any previous module… Please explain sir
Yes Madan, its explained here – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
Sir,
if I bought STAR SEP FUT @601/- at the starting of month and I’m ready to take the delivery on expiry. On expiry if STAR (scrip) closes at 650/- , then at what price will I have to take delivery of STAR ‘lot’.
This will be at the settlement price, which is at 650.
Today I sold a F&O shares of sbi at 9.16 but still 11.25 it is in open position and my portfolio is changing according to current market price.Can you please tell me how much time required to execute the same as I am not getting money back in account for further trading.
Mamita, I’d suggest you call the support desk about this. They will help you resolve this quickly.
Today i have completed the Futures Trading course which is simply best course available for free, thank you Zerodha Varsity team to make such valuable content for basically free. The explanation and examples were easy to understand. I have also completed Fundamental and technical course. this has really enlighten my financial and trading knowledge. Since i had completed my degree in commerce i was not able to apply financial knowledge except for job but now due to such valuable content it has updated and upgraded my financial knowledge and application of the same into Trading and investments.
Very happy to note that, Shankar! I hope you continue to learn and benefit from Varsity 🙂
How exactly is roll over done? How many times can you do roll over? Is it just selling on expiry and buying fresh for the next month? Can you roll over to the far month and what are the cost involved?
Rollover is monthly once, Rajesh, and its just that, selling current month and buying next month.
Dear Sir, At the time of expiry of futures, is the fund required in total of the contract value or the balance amount I. E. If I buy a lot at 100 for a contract worth 300Rs and now the price is 75… Do I have to keep 300 Rs or 200 …what happens to the loss amount.
You need to ensure you have funds to the extent of the total contract value.
Dear Karthik,
My question is about expiry of a future contract.
As date comes closer to expiry date, do span and exposure margin increases ?
What happens exactly a day before expiry and on the date of expiry ?
Physical settlement of a future contract will take place after 3:30 pm on last Thursday of the month, if we don’t square off the position, right ?
If above question is not right, is it necessary to square off all the positions one day before ?
Margin increases owing to physical delivery margins. If you square off the position before expiry, then there is no physical delivery. The choice is really yours if you want to hold the position to expiry or not.
Like Equity,is there anything like T+1,T+2 square off restrictions for futures trading…Can we buy a future lot today and sell it tomorrow?
Yes, you can sell anytime. P&L funds settlement happens on T+1 basis.
Sir, Is daily M2M settlement still applicable with physical deliveries? How does that happen actually? Till day before maturity I assume it would be the same process of daily settlement, what happens on last day of maturity actually, will there be deliveries on the basis of just last day balance settlement ?
Shreyas, yes M2M happens with Futures. On the last day of delivery you either give delivery (short futures) or take delivery (long futures).
Hi Sir, is there any physical settlement for below trade based on arbitrage strategy
NTPC JAN FUT SHORT – 130.45
NTPC FEB FUT BUY – 128.5
OPSTRA SHOWS – DIFF OF 1.95 X 5700 = 11,115/- MAX PROFIT (ARBITRAGE)
PLEASE CLARIFY MY DOUBTS BELOW. SINCE CURRENTLY IT IS IN LOSS,
1. WILL I GET THE ABOVE DIFF IN PRICE ON EXPIRY IF I DO NOT EXIT
2. IS THERE ANY PHYSICAL SETTLEMENT.
THANK FOR YOUR REPLY AS ALWAYS.
Yes, because these are two different expiries.
Which chart use in future trading for TA?
Spot market or future market chart
YOu can use either. With Futures, you can volume data as well.
Hi Karthik, I have 2 questions..1) If I don’t square of my futures position till the time of expiry, there will be a physical settlement but what if money required for physical settlement is not available in my trading account to complete physical settlement, what happens then?
2) How is physical delivery of Nifty/Bank Nifty futures contract possible?
1) Depends on your broker, but most likely the position will be cut before expiry by your broker in the absence of funds to buy the shares.
2) These are cash settled
hi, further to above query
1. will i get diff in price as profit if i close the trade one day before expiry
2. will i get diff in price as profit if i close the trade on expiry day around 3 pm
1) Profitability depends on the price you close at
2) Same as above
Hello again sir,
With due respect I’m saying this all of varsity chapters are just beyond awesome… However in this chapter …
1. What are ITM/ OTM
2. CALLS, PUT ??? Getting confused at this stage …
3. Let’s say for a contract I had a long position initiated at 913 at the contract expired at 930 how would physical settlement work … I’d get the stocks at 913 in my demat ??
4. And what if I initiated the long contract at 930 and it closed at 913
5. Another analogy Short initiated at 930 contracts expired at 913 how would I give stocks … I don’t own any … And to give at what price will I buy the same stocks before giving them …
6.what’s the SLB MARKET ? (Hearing this terminology for the first time)
7. What will be the amount actually released out the margins blocked ??
8. How will the nifty futures contract get physically settled?
Thanks, Chetan. I’ve explained all these things over this entire module. I’d suggest you take a look at this – https://zerodha.com/varsity/module/option-theory/
I think anyone who is willing to learn before entering the market should go by Varsity, nothing else is required! Thanks, Karthik Sir & Team!
Sir, suppose I initiate a long position in TATASTEEL FUT 1LOT@1230 (Jan 2022 Exp) and at the same time buy a PUT OPTION of S/P of 1240@38 (Jan 2022 Exp), Zerodha margin calculator is showing requird margin is ~17,878
including margin benefit.
My question is:
1) Can I hold the hedged position till the expiry with the initial margin? Or
2) Will I have to maintain MTM for TATASTEEL FUT in a hedged position also?
3) If i am holding the hedged position till the expiry, with the peak margin rule, should I have to maintain the ‘peak margin’ for each of the legs?
1) The margins will increase during the last week
2) Yup
3) Yes
Thank you very much Sir!
Good luck, Pritam!
Suppose I have a long futures position bought before expiry of the month. Say SPOT price of a scrip is Rs. 450/- and I decided to buy a futures contract now.
Towards the end of expiry if the SPOT CMP moves to say Rs. 380/- and my futures position is already in a LOSS MTM.
If I decide to accept delivery of this position what will be the value I will have to provide or pay?
1. Rs. 450 * lot size
2. Current future price (spot price on expiry) * lot size?
It will be the current price multiplied by the lot size, Rahul.
Hello Kartik,
This is one of the best material I have come across and explained in very simple language.
Derivative trading makes market more efficient. My question is how trading in futures of a stock affects the stock price? If we are supposed to take delivery at expiry then how the volume of stock to be traded is made available at last moment? Or is it just because the derivative exists large players can hedge their bets in stock trading making it more liquid?
Glad you liked the content, Ameya.
1) In the long run, futures of a stock has no impact on the stock price.
2) It will be updated in the bhav copy, which is available as an EOD report
3) Hedging is one of the main uses of derivatives.
I think physical settlement chapter needs latest update.
Let me check, but what updates are you referring to?
Thanks for clarification. Also, how will brokerage and STT be charged. Presume that the final expiry price is 1390, while the strike price was 1400. Will it be on entire amount (say 1390 *lot size on both legs: put and future)? Or since there is no physical settlement, it will be only on the difference of Rs 10.
Thanks zerodha team…you guys nailed it.
Happy learning!
Please, update a few sections of these Modules where the old trading terminal is referred and timely update the modules, if possible.
Thanks for the effort, This is great.
🙂
Its on the list of things, Vikas. I’ll probably do that when the module of FInancial modelling is done.
Sir I have open position in short future on expiry day. Is it required physical settlement. What are time limit to arrange fund if I don’t have sufficient fund in account.
Yes, all stock futures positions held to expiry, will be physically settled.
sir what is ITM and OTM
Check this Yash – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
hi Karthik sir,
thanks for all your teachings.
till now I had read all chapters with your answers to almost all comments,
I think I am learning about stock market as well as communication skill course form our you.😊
hats of to you…
Glad you liked the content, Karan 🙂
Happy learning!
If itm put and short future netted off at expiry
How do you show loss if any in p/l statement?
Cash settled.
Hi Karthik
Thank you for this learning material.
Please clarify below points
1) If I square off my position at 12 pm on expiry day in stock option then also I will have to go for physical settlement
2) If we have given premium for stock option ( Call or Put) then why broker is asking to add money in vallet from last 3 days before expiry
3) If we not add money in wallet or account and square off position and if it’s ITM, will we get benefit and will it be settled in cash — if liquidity is there
1) No, you will have to hold to expiry
2) That’s physical delivery margins which kick in
3) No, for physical settlement you need to ensure you carry the position to expiry
Thank you Karthik.
Please clear my undestanding for 3rd revert.
If I have not add money in wallet on expiry day and square off my position let’s say at 2 pm and my position is ITM( call or put)
It will be cash settled as per my views..
Whatever profit will be add to my account/wallet because it’s squared off by me
Please clear this doubt… I do not want to go for physical settlement
Dev, for any sort of settlement, you need to ensure the option is held to expiry. To hold to expiry, you need to have the necessary margin. If you do not want physical delivery, close out the position anytime before the expiry.
Hi Karhik Sir,
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.
Here
You mentioned sellers bring down the price.
Sir,
Which price, is it (futures price or stock price) or both?
Futures. Btw, at expiry, margins go up for both cash and physically settled contracts.
Hello sir,
I think this chapter need to republish because many people of doubt on physical settlement, exit on expiry, margin shortfall. I read too many comments in this chapter lots of people have similar questions and still new comment is coming, i also still not totally clear about physical settlement because i read many answer of you but when question is little bit different then answer is also different.
The best way to solve many people confusion to in a one attempt to edit and try to write with simple and real example which you already given previous chapters.
Thank you.
Jatin, what is the confusion?
I clear confusion via call support. 😊
Thank you.
Great. Happy learning 🙂
Hi There,
Suppose i buy Reliance Future for August Expiry and forgot to exit on Expiry . Then what will happen. Will trade get auto cut by broker . Or i will have to buy 250 Quantity as per lot size because of compulsion of physical delivery
It will be physically settled. Btw, if you don’t have the necessary margins, then you cant carry the position forward anyway.
Is there any specific timing on Expiry Thursday like 3:00/3:20 before which we have to Exit to get rid of physical settlement. And you said if we don’t have margin we can’t carry forward position does that mean the open future trade will get auto cut at MTM like intraday get auto cut at 3:20 by broker
You can exit the position anytime before the expiry to avoid physical settlement. But I’d generally prefer to exit before three to be safer.
With the new regulation executed, do we need to allot the complete contract value to buy future stocks? Or is it only for the day of settlement?
It requirement increases as you move towards expiry.
A query, 1)If i have taken an open position in Nifty Futures and i do not square off my position till expiry then being trading in Index futures physical settlement would not take place Right?,but here in case of cash settlement do i have to pay the whole Contract Value for cash settlement or only the loss? example;-Nifty Futures-buy-Rs.500 Expiry-Rs.450 Lot Size-50 Contract Value-Rs.25,000 Loss-Rs.2500 In the above scenario will i be facing direct a loss of Rs.2500 or i have to pay Rs.25000 in whole and sell at Rs.22,500.
2)Also is cash settlement=position square off and physical settlement=contract execution?
1) Indices are cash settled, so the difference will be settled
2) Yes
Kindly explain how to rollover futures in zerodha.
Check this Prasanna – https://www.youtube.com/watch?v=FqRB7NGnOtA
I missed squaring off a futures but contract.
1. What will now happen?
2. If the shares are credited to my account when is it the earliest that I will be able to sell them.
TIA
1) It will be physically settled, assuming its a stock futures contract
2) On T+2.
What happens when we fail to square off the future contract on expiry?
Eg i failed to square of the reliance future contract…so for cash settlement i need to have 250 x 2500 ( cmp) amount in my account…..but what happens when I do not have that much amount…..how does it settle then.? Please guide.
The contract will be physically settled by the broker.
Sir, thank you so much for your tutorials. They are more clearer than any class I have attended.
I have a doubt. When you trade a derivative of a stock, you should be ready to take or give delivery on expiry date..
What is the case for an index such as Nifty?
Thanks, Lalitha. I’m glad you liked the content on Varsity. In case of the index, its cash settled.
I didn’t understand what does exiting before expiry mean? Like deliver the shares before date or rescind the contract?
It just means that you are closing down or squaring off an existing position and not waiting for the expiry.
In the netting off method, what happens if one position is ITM and other is OTM?
Netting off is done only if both are ITM. Won’t happen if one is ITM and other is OTM.
Hello Karthik,
First of all, thank you for the wonderful course on Futures trading. Like other modules, the course is highly comprehensive and easy to understand.
I have a fundamental question, Futures is mainly traded when you have an accurate view on the price direction of the asset. But is this for short term(based on some news or expectation) or long term(2-3 months overview)?
And how to manage overnight risk?
Thank you.
Regards,
Naveen Masali
If you have the margins to hold the position, then you can hold it for multiple months; not necessary it has to be a short-term view. But I personally prefer to hold futures for shorter duration.
I spend couple of days in Zerodha Varsity future trading sections, no can explain better than this . Kudos Zerodha Team
Glad you liked the content, Happy learning 🙂
Sir
Margins shown in this module range b/w 30k – 60k, but currently the margins required are around 1 lakh for every stock
Yeah, margins keep changing based on the market situation, Bhaskar.
If I am doing long straddle and hold both options till the expiry. Do I have to take the stocks as part of physical delivery by paying such a huge amount or will zerodha settle it and credit my account with the profit after deducting brokerage?
Yes, if the Call option becomes ITM, you will have to take physical delivery of stocks.
As usual, great content and very helpful. I enjoyed learning this modules as much as you enjoyed writing it. Thank you very much.
Thanks for letting me know, Paul. Happy learning 🙂
Sir,
What is the maximum time upto which I can keep the shares before it will be considered for Physical Settlement? Or what is the max time upto which I can keep the futures to be considered for Cash settled?
Right up until expiry of the contract. If you square off before expiry, then there is no physical settlement, but if you do hold the position to expiry, then all positions will be physically settled, except for indices.
Sir,
Does it mean that I will be considered for cash settlement if I square off on or before 3:20 pm on the day of expiry
Yes, physical settlement is only if you hold the position to expiry.
Really appreciate things explained in details. I have a few doubt here:
1. Is rolling over simple as squaring off my current position and entering same position for the next expiry?
2. Are ITM options usually liquid? Or is it a bit risky in the last week. I mean, if everyone is rolling over, and i want to also square off my position, who will really be my buyer? Considering everyone will prefer buying the next expiry?
Thanks
1) For rollover check this – https://www.youtube.com/watch?v=FqRB7NGnOtA
2) Deep ITMs are not so liquid, especially compared to ATM. Do watch that video, I think your questions will be answered.
Hello Mr Rangappa,
I have question regarding physical settlement of shares/stocks. Imagine I don’t square off a position till expiry, i will take/give physical delivery of the option. What happens if I have a NRO non PIS account where i cannot buy/sell equity, i can only do option trading?
Regards
Sumeeta
Under the overview section it’s written, SEBI mandated physical settlement of stock F&O to curb excessive speculation leading to increased volatility.
Sir, could you please explain how cash settlements alleviate this situation?
When you have to take physical delivery, the cash outflow is indeed much higher. This keeps speculators at bay. This is a good topic, will put up a post soon.
Sir, is additional margin required to hold on calendar spread to expiry ?
Depends on how the market moves, Satish.
Hello Sir,
Is it necessary to hold future lot for the month for which I purchase or I can exit at any point of time?
Suppose I go long for any stock for far month contract, can I exit from it in current month or I have to keep that contract till that month?
You can exit the position anytime you wish, no need to hold the position till expiry.
Sir,
Kindly answer my query about physical settlement of Bharati Airtel:
Lot size is 950 and expiry price is Rs.1000/-)
Suppose I have 950 shares of Airtel in my dmat account. As per physical settlement if I sold (short) one lot of Airtel and wait till expiry as per new rule I have to give delivery to airtel share.
In this case, my query is
1. When the expiry date come near, will my broker will ask for more margin (i.e. full contract amount (950 x Rs.1000) ? because on the date of expiry, I have to give delivery to Airtel shares i.e. 950 shares which I have already in my dmat account and not money.
In that case will it be okay if i only maintain margin amount and not full amount on the date of expiry?
Hope you got my query.
Kindly reply
Please post your query, I’ll surely reply 🙂
Sir,
Kindly answer my query about physical settlement of Bharati Airtel:
Lot size is 950 and expiry price is Rs.1000/-)
Suppose I have 950 shares of Airtel in my dmat account. As per physical settlement if I sold (short) one lot of Airtel and wait till expiry as per new rule I have to give delivery to airtel share.
In this case, my query is
1. When the expiry date come near, will my broker will ask for more margin (i.e. full contract amount (950 x Rs.1000) ? because on the date of expiry, I have to give delivery to Airtel shares i.e. 950 shares which I have already in my dmat account and not money.
In that case will it be okay if i only maintain margin amount and not full amount on the date of expiry?
Hope you got my query.
Yes, the broker will insist on higher margins for physical delivery.
Sir,
Why I will require higher margin?
I have shares in my demat account and on expiry broker will debit shares from my demat account
These are two different segments, Anant. So margins are required.
I am wondering about what would happen if the loss on a future contract is greater than the margin money? Say, I was long an a company future where total margin money was 16% of contract value and price of the share declined by 24% in a day, how would the money be recovered from me? Or, is it that the future contract would be sold before margin money is exhausted because of the price change?
~Thank you
As the loss equals margins, the broker will start alerting you to bring in more funds if you wish to keep the position. Else, the broker will cut your position. That said, it is a risk for the broker in situations where there are drastic price movements.
Thank you!
Happy Pongal, Makar Sankranti, Bihu, …
Thanks Pranav, wishing you the same!
Suppose i sell 1 lot of nifty 50 in future market of current month and don’t square off the position a expiry then
how i will buy nifty
Then it will be settled fully upon expiry, Sajal.
I was slightly confused about the physical settlement after the expiry of a future contract.
Suppose I buy a future contract (lot size = 100) today @ 50 Rs. So, the contract value is 5000 Rs. Say I have to pay only 500 Rs (10% of the contract value) to enter the long position.
I hold the position till expiry when the future price (and the underlying price) becomes 75 Rs. Since I was long, I need to take delivery of stocks now. Do I now need to pay an additional margin of 5000 Rs (original contract value) to take the delivery? If so, will my net profit be 75*100 – 5000 – 500 = 2000 Rs after taking the delivery?
In futures, the price is based on the settlement price (remember there is M2M). So in this case its 75.
What will be the net profit calculation in that case?
The difference between the opening price for the day and the final settlement price (upon expiry) for the day, multiplied by the lot size.
Sir, that would be the M2M for the day, right?
Actually, my confusion is that since a long future expired, I would be required to buy the agreed upon number of shares from the seller at the settlement price i.e., 75 in my case. So, how would this affect my PnL?
The settlement would happen upon the settlement price and P&L would depend on that. Yeah, 75 in this case.
Hi,
If I have a long position in RIL futures for May. The current month is Apr. So, do I need to close the futures position for RIL in Apr (Current month) on expiry ? Or I can continue to hold the May contract for RIL until May expiry ?
Thanks,
Ankit
If you wish to contine holidng the futures position i.e you want to roll over, then its best if you square off the April contract and initiate the same postion in May. You can check this video – https://www.youtube.com/watch?v=FqRB7NGnOtA&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=5
sir how can we calculate weekly future can u plzz explain
Calculate weekly futures means?
What will happen to initial margin paid if I take physical delivery of MCX futures contract.
It will be offset against the delivery settlement.
I missed to close the SELL future contract of Tatamotors 3 lot @1072 price. What are my options to minimize my losses here. please suggest the best options to over come. This the first time made this mistake. so no experience.
This will be physically settled, so nothing much you can do now. But do ensure to track your positions and close them before hand to avoid physical delivery, unless you are keen on one.