Options traders: Options traders could face big losses as NSE scraps ‘do not exercise’ facility

In a circular on Monday, NSE Clearing Ltd said the facility of ‘do not exercise’ (DNE) available for stock options on the March 2023 expiry of F&O contracts should be discontinued. This facility allows brokers to stop exercising option contracts on behalf of clients.

NSE reintroduced the DNE facility in April 2022 after discontinuing in October 2021 after brokers complained of trading mishaps during the expiry of equity derivatives contracts with traders unable to meet their settlement obligations connected to physical delivery.

Market regulator Sebi introduced physical settlement in derivatives in October 2019. If an investor has an open position in any individual stock option contract, he will be required to take or give delivery of stocks when the options are exercised. The contract gets exercised only if it’s ‘In The Money’ at the time of expiry.

Brokers worry that traders in the options market, who are unable to close their open positions on the expiry day in individual stock option contracts, will have to face a huge risk of settling their trade with shares.

“Now, in the absence of the DNE facility, options traders, whose contract is even 5-10 paise in-the-money (ITM), will be forced to take the physical delivery of the shares and incur large losses,” said Jimeet Modi, CEO & Founder, SAMCO Securities. “The DNE facility helps the option traders mitigate their losses where they cannot square off their positions before the expiry day.”

Currently, derivatives positions are physically settled on the expiry day.