In a major relief to the stock traders, the National Stock Exchange of India (NSE) has reintroduced the ‘Do Not Exercise’ feature on the expiry day in stock option contracts with effect from April 28, 2022.
In October 2019, SEBI mandated physical settlement of stock derivatives. That is, if your position in a stock option contract is open on the day of expiration, you will be required to take/give delivery of the stock when the option is exercised. The contract is exercised only if it is ITM (in-the-money) at the time of termination.
Until October 2021, a trader had the option to submit a request in the ‘Do Not Exercise’ (DNE) window (for certain trades) stating that he did not wish to exercise the right to give or take delivery .
That last resort of ‘don’t exercise’ feature was discontinued on 14 October.
Following this move by NSE, some traders in the options market, who were not able to close their open positions on the day of expiry, got burnt fingers as they had to physically settle the shares on the expiry date.
Option holders were effectively compelled to take physical delivery of the underlying stock or take delivery of the stock, depending on the type of option.
This puts the option buyers most at a loss – who have the ‘right’ to buy or sell a stock on a specific date or at a specific price on a particular date – by paying a certain amount called a premium. These traders became ‘obligation’ to take or give delivery of shares as part of their ‘right’ to buy or sell, with the understanding that their liability was limited.
With the reintroduction of the ‘Do Not Exercise’ feature, the risk of loss will be reduced for traders who are unable to liquidate their positions before the day of expiry.
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