How settlement of derivatives happens – The Hindu BusinessLine – BusinessLine

Gone are the days when the derivatives contracts were cash settled. As per the Securities and Exchange Board of India mandate, derivatives contracts are physically settled since October 2019. This means if you are long on futures contract of a stock on expiry, you must take delivery of the underlying stock.

Similarly, if you hold short futures of a stock, you should deliver that stock to the counter party i.e., the futures buyer. Settlement price will be the closing price of the underlying on the expiry day. For example, you have bought futures contract of stock A at ₹100 which expires at ₹120 (settlement price). Assuming that the lot size is 1,000 shares, you will be debited ₹1.2 lakh and 1,000 shares of stock A will be credited in you demat account after expiry. While you may have initiated the futures contract with, say, 15 per cent margin i.e., ₹15,000, you should make sure to maintain a margin of ₹1.2 lakh if you plan to take delivery. Insufficient margin amount could attract interest or penalty depending on the broker with whom you have the demat account.

In case you shorted futures, the seller of the futures must deliver the stocks to the futures buyer. Shortage or unavailability of shares will attract penalty. The same applies to in-the-money (ITM) options contract. At-the-money (ATM) and out-of-money (OTM) options will become worthless, and the physical settlement does not apply to them. For options, settlement price will be the strike price. Buyer of the call option will take delivery of the stock whereas the seller of that option will have to deliver the stock. In case of put options, the buyer delivers the stock whereas the seller should buy the stock.

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