Futures and Options: NSE Scraps 'Do Not Exercise' Facility; What's It?

The National Stock Exchange (NSE) has decided to stop the ‘Do Not Exercise’ (DNE) facility on this expiry day in the stock option contracts, from March 30. This month, the expiry will fall on March 29 as the stock market will remain closed on March 30 on account of ‘Ramnavmi’, thus the DNE will be available till March 29. However, the DNE facility will continue for the Index Option traders.

Introduced in 2017, the Do Not Exercise facility was stopped in October 2021. However, it was again introduced in April 2022.

What is DNE?

The system is a fail-safe for options traders during the time of cash-settlement of options contracts. The facility allows traders to give explicit instruction to brokers to not exercise the option and automatically square off their out-of-money positions.

By using a DNE instruction, clients could tell their brokers not to exercise the option strike price if the STT amount was greater than the premium value of the respective option contract. But it was discontinued in October 2021 as the STT tax law changed.

The removal of DNE in October 2021 created a risk of physical delivery. For instance, if a client did not settle his option contract before expiry, he would need to take or give delivery of the respective stock mandatorily, irrespective of whether or not he had sufficient funds in his account.

What Will Happen Now?

Now, it will be mandatory for traders to either square off their existing in-the-money positions before the expiry of the contract or ensure physical delivery. The situation for a put option buyer holding in-the-money contracts at the time of the expiry is especially grim as he would have to buy the shares from the auction and deliver to the put writer.

“One should not wait for the last date of the expiry to square off one’s strike as chances are high of not finding counter party to one’s position and in that case your stock option strike would go into the delivery. So, one should square off one’s strike little earlier than the date of expiry and in case you want to go into the delivery, you should keep full money in your demat account to avoid penalty and interest payment on the residue amount after the premium payments,” said Avinash Gorakshkar, head of research at Profitmart Securities, according to a livemint report.

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