NSE scraps ‘do not exercise facility’. What is it, how it impacts F&O traders?

According to stock market experts, this will have negative impact on option trade volume as one won’t have auto square off facility after the end of monthly option in stock option trade. Now, the settlement will go into the cash delivery segment where an option trader will have to pay the required margin to take delivery. The margin will be very high and they will have to pay interest and penalty as well if they have taken strike without having full amount in their demat account. However, they said that the step taken by NSE would discourage high risk option trade and push cash trade, which is good for a low risk trader and investor.

On how this NSE’s step to scrap DNE facility will impact India’s F&O traders, Avinash Gorakshkar, Head of Research at Profitmart Securities said, “In current DNE facility, a stock option trader has the facility of auto square off. So, if an option trader leaves its position after strike, then it would automatically get squared off and one need not to pay the residual amount other than the margin money used for strike. But, from next month, this auto square off facility won’t remain available and in that case one’s position will go into delivery for settlement and hence one will have to deposit the residual money if the trader had mere margin money in one’s demat account.”

Explaining how it will impact F&O traders, Anuj Gupta, Vice President — Research at IIFL Securities said, “Suppose you hold a call option at ₹2000 with a lot size of 300. In absence of DNE facility, if you left your strike open then you will have to cough up ₹6 lakh ( ₹2000 x 300) to take delivery under new NSE F&O rules applicable from next month.”

May have to pay penalty

Anuj Gupta said that it would contain strikes that option traders used to exercise at the end of expiry session, leaving one’s strike for auto settlement. Now, to get premium, one will have to cough up 100 per cent worth of stocks. He said that in case of stock option strike going into delivery and one has no cash in one’s demat account, then in that case broker will levy interest and penalty on the trader that varies from 15 to 20 per cent, depending upon the penalty rule applicable to one’s broker.

How to avoid loss in absence of DNE facility

On how to overcome the losses due to non-availability of the DNE facility, Avinash Gorakshkar said, “One should not wait for the last date of the expiry to square off one’s strike as chances are high of not finding counter party to one’s position and in that case your stock option strike would go into the delivery. So, one should square off one’s strike little earlier than the date of expiry and in case you want to go into the delivery, you should keep full money in your demat account to avoid penalty and interest payment on the residue amount after the premium payments.”

This is not the first time when NSE has scrapped DNE facility for F&O traders. On 14th October 2021, DNE facility was scrapped earlier also but it got re-established on 28th April 2022 after traders’ complaint on brokers not letting them known about the same.

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