NSE reintroduces ‘Do Not Exercise’ facility in stock options
Premium- With the reintroduction of the ‘Do Not Exercise’ facility, the risk of losses for traders who are unable to square off their positions before the expiry day will be mitigated
In a major relief to stock traders, the National Stock Exchange of India (NSE) has reintroduced the ‘Do not Exercise’ facility on expiry day in the stock option contracts, effective 28 April, 2022.
In October 2019, Sebi mandated the physical settlement of stock derivatives. That is, if your position in any stock option contract is open on the expiry day, you will be required to take/give delivery of stocks when the option is exercised. The contract gets exercised only if it is ITM (In-The-Money) at the time of expiry.
Until October 2021, a trader had an option to submit a request in the ‘Do Not Exercise’ (DNE) window (for some trades) stating that s/he did not want to exercise the right to give or take delivery.
That last resort of ‘Do not Exercise’ facility was discontinued on October 14.
After this move by NSE, some traders in the options market, who were unable to close their open positions on the expiry day, had burnt their fingers as they had to do physical settlement of shares on the expiry date.
Option holders were effectively forced to take physical delivery of the underlying share or give delivery of the share depending on the type of option.
This hurt the option buyers the most who - by paying a fixed sum called a premium - hold the ‘right’ to buy or sell a stock at a particular price on a particular date or by a particular date. These traders with the understanding that their liability is limited were caught off-guard as their ‘right’ to buy or sell had become the ‘liability’ to take or give delivery of the shares.
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With the reintroduction of the ‘Do Not Exercise’ facility, the risk of losses for traders who are unable to square off their positions before the expiry day will be mitigated.
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