A circular issued by the National Stock Exchange (NSE) on January 20 this year, has been largely ignored for over two months, but has now suddenly caught the attention of a large section of market participants.
The circular, which notifies about the discontinuation of the ‘Do Not Exercise’ facility in the stock options segment, is likely to have a significant impact on the market. With stock options now settled with physical delivery, unlike index options that are cash-settled, the new rules are likely to create increased volatility and mispricing in stock options on expiry day. This could create a situation where traders with deep pockets make huge gains at the cost of smaller traders.
Let’s take an example to illustrate this. Let’s say a stock X settles at Rs 1,001 on expiry day, which is March 29th. A trader who is long its 1,000 strike price call option, until now, had the option to not exercise his/her right of being able to buy the shares at Rs 1,000, given the marginal profit. But now, with the ‘Do Not Exercise’ facility gone, he/she must mandatorily take delivery of shares. With F&O contracts generally priced around Rs 5 lakh per lot, this could mean huge sums of money.
This is likely to create a situation wherein traders with deep pockets could make huge gains at the cost of smaller traders. In the above example, let’s assume the shares settle at Rs 1,020. Now, the buyer, assuming he/she doesn’t have the funds to take delivery, is forced to sell his/her call options that have an intrinsic value of Rs 20 at whatever price bids are at. The result? Traders with deep pockets get huge bargains!
The discontinuation of the ‘Do Not Exercise’ facility in the stock options segment is likely to have a significant impact on the market. It is important for traders to be aware of the changes and the potential impact on their trades, as well as the potential opportunities that may arise. With increased volatility and mispricing, traders with deep pockets may have an advantage over smaller traders.
(Edited by : Sangam Singh)
First Published: Mar 23, 2023 3:09 PM IST
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