Comment on Policy on settlement of compulsory delivery derivative contracts — Update Oct 2019
commented on
20 Jul 2020, 04:12 PM
If you have sold put options, on expiry it will result in taking delivery. Hence having money in your account is sufficient.
Cons of this approach –
1) This will result in 0.25% brokerage + STT + stamp duty + DP Charges etc. etc.
2) It takes T+2 days for shares to hit your DP account and prices might fluctuate in the mean time
Alternative Approach –
1) Maintain required margin and square it off before expiry
Or 2) Buy ITM Call Option, two days before expiry
Or 3) Sell ITM Put Option, two days before expiry
According to me alternative approaches are better than holding cash because of three reasons –
i) the price is locked
ii) you will only pay 0.1% (20/- in case 1) compared to 0.25%
iii) you will not pay DP and other charges related to physical delivery
The only con of following 2 & 3 is that – if price moves in your favor on Wed or Thrus, you will not benefit from it. Plus in case of 2 & 3 you will end up paying 0.1% brokerage and STT on settlement. So follow method 1 if you think your contracts can have enough liquidity on the day of expiry, if not 2 & 3 are the next best options