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.

195 comments

  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
    21.06.20

    • 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

  12. VEERANNA HIREMATH says:

    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?

    Thanks.

  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?

    Thanks

    • 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:

    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

    • 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.

  29. Mayank Maheshwari says:

    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!

    • Karthik Rangappa says:

      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.

  30. Mayank Maheshwari says:

    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?

  31. Arjun Singh Rawat says:

    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

  32. Abel Xavier Roy says:

    hello Karthik,
    What happens in case of physical settlement of Nifty futures?

  33. AYUSH GARG says:

    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 )

  34. AYUSH GARG says:

    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

  35. yuvraj yewale says:

    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?

    • Karthik Rangappa says:

      Find gaps ups/down as in before it happens or on the chart? Its not possible to identify these before it happens 🙂

  36. Ayush Garg says:

    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

  37. Mohit Jain says:

    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?

  38. Vimal Kumar says:

    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

  39. Vimal Kumar says:

    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.

  40. Shashank Pendyala says:

    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?

  41. Daniel Abraham says:

    Sir, is there any method where I could stay shorted in the market for a period of 1-2 years?

  42. Adil mansoori says:

    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

  43. Manjunath says:

    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.

  44. Alagarasan says:

    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.

  45. Alagarasan says:

    Also I already bought IOC 105 Jan- 1 lot, if I add 2 more lots will this helps to skip physical settlement.

  46. C V Girimon says:

    Hi
    I had bought futures 1 lot of [email protected] 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

  47. Girimon says:

    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

  48. Girimon says:

    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

    • Karthik Rangappa says:

      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.

  49. Jay says:

    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?

  50. Jay says:

    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.

  51. Jay says:

    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

  52. mahima says:

    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?

  53. Janta says:

    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?

    • Karthik Rangappa says:

      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.

  54. Janta says:

    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.

  55. Janta says:

    Dear Sir,
    I mean after closing bell at 3:30 pm.
    how can i continue to trade till 4 pm?

    • Karthik Rangappa says:

      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.

  56. Janta says:

    Dear Sir,
    Is there a reason why companies like HDFC sec do not allow AMO for F/O contracts?

  57. Janta says:

    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?

  58. Harshit Badolla says:

    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?

  59. Harshit Badolla says:

    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?

    • Karthik Rangappa says:

      Thats right. If you don’t have the margins, the position will be closed by the broker before the expiry of the contract.

  60. Jay says:

    Hi Karthik

    Is the taxation module up to date?

  61. Saurabh Sharma says:

    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

    • Karthik Rangappa says:

      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.

  62. Sheirsh says:

    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

  63. Sheirsh says:

    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

    • Karthik Rangappa says:

      There were few loopholes using which the market participants were trying to manipulate prices, this got plugged with physical delivery.

  64. Sheirsh Saxena says:

    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.

  65. Yograj says:

    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?

    • Karthik Rangappa says:

      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 🙂

  66. Naveen Sharma says:

    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

  67. Ruben says:

    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?

  68. Rajdeep Dey says:

    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?

  69. Rajdeep Dey says:

    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?

  70. Ankur Jain says:

    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.

  71. Gaurav bathla says:

    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….

  72. Karthik Nallathambi says:

    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

    • Karthik Rangappa says:

      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

  73. Himanshu Chhabra says:

    In PDF of Fututres Module, “Quick Note on Physical Settlement” is missing .Pls add it

  74. Prince Gandhi says:

    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?

  75. Prince Gandhi says:

    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?

  76. Sagar says:

    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?

  77. Sachin Gupta says:

    Loved It !!! Thank you.

  78. Ambarish Vahikar says:

    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.

    • Karthik Rangappa says:

      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.

  79. Rahul Kumar says:

    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.?

    • Karthik Rangappa says:

      You need to ensure you have enough margin amount even before you head to expiry, a few days earlier.

  80. Nilesh says:

    Sir,
    Is there any obligation of physical settlement while trading Indices F&O?

    Thanks in advance!

  81. SRIKANTH ANNABOYINA says:

    U r modules are just awesome
    It enlightened my understanding
    and driving towards futher exploration
    Tq for sharing u r valuable research

  82. Sajam says:

    Hello Sir,

    Where can I see real time MWPL so I should know whether to enter a derivative position or not?

    • Karthik Rangappa says:

      MWPL is fixed for the day, does not change real-time. OI does, which you can track on Kite/Sensibull.

  83. Sajam says:

    Hello Sir,
    Apart from the NSE website, where can I view MWPL?

    So I can know whether I should enter a trade or not

  84. chilesh kumar says:

    Are nifty futures also physically settled ?

  85. Kanishk says:

    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.

    • Karthik Rangappa says:

      1) Yes, but will have to be unpledged first
      2a) Yes
      2b) Yes, margins will increase in the last week.

  86. Kanishk says:

    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?

    • Karthik Rangappa says:

      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.

  87. Sathya says:

    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?

    • Karthik Rangappa says:

      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

  88. sathya says:

    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

    • Karthik Rangappa says:

      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.

  89. Kanta says:

    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

    • Karthik Rangappa says:

      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.

  90. Kanta says:

    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?

    • Karthik Rangappa says:

      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.

  91. Kanta says:

    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.

    • Karthik Rangappa says:

      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.

  92. Swapnil says:

    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.

    • Karthik Rangappa says:

      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.

  93. Ashlesh says:

    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

    • Karthik Rangappa says:

      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.

  94. Praveen says:

    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?

    • Karthik Rangappa says:

      Glad you liked the content, Praveen. Physical delivery is possible only if you hold to expiry, else it’s not applicable.

  95. Surpan says:

    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?

  96. Surpan says:

    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

  97. Surpan says:

    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??

  98. Madan says:

    What is ATM, OTM, ITM in f&o.Does these discussed in any previous module… Please explain sir

  99. Kaushal Parashad says:

    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’.

  100. Mamita Behera says:

    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.

  101. Shankar Salgaonkar says:

    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.

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