We have an important update to share with you about the current March 23 & subsequent expiry series. The National Stock Exchange (NSE) has recently eliminated the ‘Do Not Exercise’ (DNE) option for F&O traders. As a result, traders must exercise extra caution to avoid any unnecessary liabilities or losses.
The DNE option allowed brokers to report positions as DNE to the exchange, allowing clients to close positions without any delivery or fund obligation if they were close to being in-the-money (ITM) due to the settlement price of the underlying asset. To understand why DNE was significant, consider the following example:
Suppose RELIANCE 2200 PE contracts (lot size 250) were trading between Rs. 0.05 - Rs. 5.20 between 3:15 - 3:30 pm, while the underlying price of RELIANCE was between Rs. 2195 - Rs. 2200 during the same time. After the market closes, the adjusted settlement price of RELIANCE is announced as Rs. 2198.25, making the 2200 PE option in-the-money. This implies that any trader with a buy position in this put option is now responsible for making delivery of 250 shares of RELIANCE. Since he does not hold any of these positions, this would lead to auction and thereby heavy losses. The difference of only Rs. 1.75 between the trading price and settlement price could create a securities obligation for the trader.
On the other hand, for an in-the-money call option would result in fund obligation worth Strike price x Lot Size. To avoid such scenarios, the DNE option offered by the exchange was used as a tool to avoid delivery obligations.
However, with the elimination of DNE, traders’ open positions will now result in delivery obligations, and they will have to deposit the residual funds. In the case of a put option, the trader may end up creating a securities obligation that is not present in their demat account, and the securities may end up being auctioned.
Therefore, it is recommended that traders exercise extra caution and closely monitor their open positions to avoid any unwanted liabilities or losses.
Product Operations @ Dhan