How physical settlement works
| Position at expiry | What happens | You need |
|---|---|---|
| Long stock futures | You buy the shares at the final settlement price | The full value in funds |
| Short stock futures | You deliver the shares at the final settlement price | The shares in your demat account |
| Long call, in the money | You buy the shares at the strike | The full value in funds |
| Long put, in the money | You deliver the shares at the strike | The shares |
| Short call, in the money | You deliver the shares at the strike | The shares |
| Short put, in the money | You buy the shares at the strike | The full value in funds |
| Any option out of the money | It expires worthless; nothing is delivered | Nothing |
Delivery happens through the normal cash-market settlement cycle after expiry day. Shares and funds move on the settlement date, and a trader who cannot deliver shares faces an auction and its penalties.
A worked example on one lot
You hold one lot of a stock's 1,400 call, with a lot size of 500 shares, bought at ₹51.70 (₹25,850 a lot) with the stock at ₹1,400. On expiry day the stock closes at ₹1,470.
| Item | Amount |
|---|---|
| The call is in the money by | ₹70 a share |
| You pay to take delivery | 500 × ₹1,400 = ₹7,00,000 |
| You receive | 500 shares, worth ₹7,35,000 at the close |
| Value of the delivery | ₹35,000 |
| Premium paid | ₹25,850 |
| Net result before charges | ₹9,150 |
The option made ₹9,150, but taking delivery needed ₹7,00,000 in the account. Selling the call on expiry day at about ₹70 would have given the same ₹9,150 without the delivery. Without the funds, the broker would have closed the position before expiry or the delivery would have failed. That is why most traders exit in-the-money stock options before the expiry week.
Why India moved to physical settlement
SEBI introduced physical settlement for stock derivatives in phases from July 2018, and all stock futures and options have been physically settled since October 2019. Cash settlement let large positions expire without any link to the shares, which SEBI judged made manipulation of expiry prices easier. Delivery ties the derivatives price to the cash market at expiry and discourages speculative positions held into the last day.
The expiry week
| Days before expiry | What changes |
|---|---|
| About four trading days | Exchanges start collecting delivery margins on positions that could lead to delivery, rising each day until expiry |
| Two to three days | Many brokers block new positions in in-the-money stock options |
| One to two days | Brokers close in-the-money positions of clients who do not have the funds or shares to settle |
| Expiry day | Positions still open at the close are settled by delivery |
Check your broker's policy for the expiry week; cut-offs differ and are often earlier than the exchange's. A trade meant to last a few weeks is usually opened in the next month's contract to stay clear of the current month's expiry week.
Costs of a physical settlement
A delivery is charged like a cash-market trade on the full value of the shares, not on the premium: STT on the delivery value, exchange charges, stamp duty on the buy side, and the DP charge when shares leave your demat account. On the ₹7,00,000 delivery above, STT alone is ₹700 at 0.1%, against ₹52.50 of STT on selling the option at ₹70 (0.15% of the ₹35,000 premium). Brokers may add a fee for physically settled positions.
Cash settlement, for comparison
Index futures and options settle in cash at the index's closing value on expiry day. A Nifty 25,000 call that expires with the index at 25,150 pays ₹150 a unit, ₹9,750 on a lot of 65, credited to the account; nothing is delivered. Exercised index options pay STT at 0.15% of the intrinsic value. Because there is no delivery, index positions can be held to expiry without the funds for the full contract value.
When physical settlement matters most
- Stock options and futures in the expiry week, when delivery margins and broker cut-offs apply.
- In-the-money options near expiry, which become share purchases or sales.
- Sold puts, which can leave you buying a full lot of shares after a fall.
- Stocks in the F&O ban, where positions cannot be adjusted and may be closed by the broker.
Related terms
- F&O ban meaning: when no new positions are allowed in a stock
- Expiry meaning: when contracts settle
- Lot size meaning: the number of shares one contract delivers
- Intrinsic value meaning: what an in-the-money option is worth at expiry
Learn more
- Stock options trading: how stock options work on NSE, including delivery
- Futures basics: how futures contracts work and settle
- Covered call strategy: a strategy where delivery of the shares is part of the plan
Frequently asked questions
Are Nifty options physically settled?
No. Nifty, Bank Nifty, FinNifty and Sensex contracts are settled in cash at the index's closing value. Only stock derivatives are settled by delivery.
What happens if I hold a stock future until expiry?
A long future takes delivery of the shares at the final settlement price and a short future delivers them. You need the full funds or the shares.
Can I avoid physical settlement?
Yes, by closing the position before expiry. Most traders exit in-the-money stock options and futures before the expiry week.
Do I need the full amount for delivery?
Yes. Taking delivery of a long call or a short put means paying strike × lot size for the shares. Brokers collect rising margins in the expiry week to make sure the funds are there.
What if I do not have the shares to deliver?
The exchange buys them in an auction on your behalf, and the auction price plus penalties is charged to you. Brokers usually close such positions before it comes to that.
Sources
- SEBI: physical settlement of stock derivatives, phased in from July 2018 and completed in October 2019
- NSE: settlement procedures for stock futures and options and the delivery margin schedule in the expiry week
- Finance Act, 2026: STT rates from 1 April 2026