Index options in India are settled in cash. Stock options are different: since October 2019 every stock futures and options contract on Indian exchanges is physically settled. An in-the-money stock option left open at expiry turns into an actual purchase or sale of shares, for the full value of the lot.
How it came about
SEBI introduced physical settlement of stock derivatives in 2018 and phased it in: a first set of stocks moved to physical settlement from the July 2018 expiry, and from the October 2019 expiry it applied to all stock derivatives. Index derivatives such as Nifty, Bank Nifty and Sensex options remain cash-settled.
What happens at expiry
| Position at expiry | If in the money | If out of the money |
|---|---|---|
| Bought call | You buy the shares at the strike: you pay strike × lot size | Expires worthless |
| Sold call | You deliver the shares at the strike | Expires; you keep the premium |
| Bought put | You deliver the shares at the strike | Expires worthless |
| Sold put | You buy the shares at the strike | Expires; you keep the premium |
| Futures (long or short) | Always settled by delivery at the settlement price | — |
In-the-money options are exercised automatically on expiry. Moneyness is measured against the final settlement price of the stock set by the exchange. Monthly stock options on NSE expire on the last Tuesday of the month, or the previous trading day if that is a holiday.
A worked example
Take an unnamed stock "at ₹1,000" with an illustrative lot size of 500 shares, so one lot is worth ₹5,00,000 (5 lakh). You hold one lot of the ₹1,000 call. At expiry the stock settles at ₹1,050, so the call is ₹50 in the money.
- You must pay ₹5,00,000 (strike × lot size) and receive 500 shares worth ₹5,25,000 at the settlement price.
- The intrinsic value is ₹25,000, but to receive it you have to fund the full purchase, or have closed the option before expiry.
- If you hold the put instead and it ends in the money, you must deliver the shares. If you do not own them, the delivery fails and the exchange's auction and close-out penalties can apply.
Illustrative numbers
The stock price and lot size are made up for the arithmetic. Real lot sizes for each F&O stock are set by NSE and revised twice a year.
Why margins rise in expiry week
Because an option can turn into a delivery worth lakhs, brokers collect additional delivery margin on in-the-money positions as expiry approaches, rising day by day. One large broker publishes this schedule for in-the-money long options, counting back from the Tuesday expiry:
| Day | Delivery margin |
|---|---|
| Expiry minus 4 (Wednesday) | 10% of exchange risk margins (VaR + ELM + adhoc) |
| Expiry minus 3 (Thursday) | 25% of exchange risk margins |
| Expiry minus 2 (Friday) | 45% of exchange risk margins |
| Expiry minus 1 (Monday) | 25% of contract value |
| Expiry day (Tuesday) | 50% of contract value |
Short options and futures also face higher margins on expiry day, and some brokers block margin on out-of-the-money strikes very close to the stock price, since these can end up in the money. Each broker sets its own policy within the exchange rules, and many square off positions they consider unfunded before expiry. Read your broker's physical settlement policy before holding stock options into expiry week.
Netting
Opposite positions in the same stock and expiry can offset each other's delivery: for example, a long future and a short in-the-money call of the same quantity result in no net delivery. Brokers may still charge delivery margin on each leg separately until expiry.
STT and charges on exercise
- An exercised option pays STT on its intrinsic value at settlement, at 0.15% under the rates in force since 1 April 2026.
- A physically settled contract is also treated as a delivery trade, and brokers show delivery STT of 0.1% on the contract value on the contract note.
- Closing the option in the market before expiry instead pays STT only on the premium of the sell order. Compare the two for your own position.
- Delivered shares land in (or leave) your demat account like any delivery trade, with the usual delivery charges.
Close or fund before expiry
If you do not intend to take or give delivery, close in-the-money and near-the-money stock option positions before expiry day. Unfunded positions can be squared off by the broker, and failed deliveries carry penalties.
Examples use illustrative values, not current market data. This is general education, not investment advice.