What are the risks associated with the physical delivery of stock Futures & Options (F&O)?

A. The physical delivery of stock Futures & Options (F&O) comes with certain risks that traders should be aware of:

Systemic Risk: Physical delivery in stock derivatives introduces potential systemic risks in the Indian capital markets, creating a threat to traders.

Cash and Stock Requirements: If a customer holds stock futures or in-the-money stock options at expiry, they must give or take delivery of the entire contract’s stock value. This can be challenging for traders without sufficient cash or stocks, increasing the risk.

Margin Requirements: As the expiry date approaches, the margins needed to hold a future or short option position increase. A minimum of 40% of the contract value is required on the last two days of expiry.

Long Option Positions: Even In-The-Money (ITM) long or buy option positions require a delivery margin four days before expiry. The margins for long ITM options increase from 10% to 50% of the contract value, with 50% required on the last two days of expiry.

Square Off: If a customer lacks adequate funds or stocks for delivery, the broker squares off the contract. An intent to hold after higher margin blocking indicates an intention to give or take delivery.

OTM Option Risk: Risks arise from out-of-the-money (OTM) options that become ITM on the last day of expiry. No additional margins are blocked for OTM options in the expiry week, posing a potential risk if they suddenly become ITM.