How Are Derivative Contracts Physically Settled in India and What Do Commodity Trends Indicate?
About the Policy: In India, all stock derivatives—both futures and options—are now settled through physical delivery. This means that traders must either deliver or take delivery of the underlying shares upon expiry, depending on their position. This shift from cash settlement to physical settlement was introduced to curb speculative trading and promote genuine hedging practices in the equity derivatives segment.
Understanding Physical Settlement in F&O
Consider a trader who buys one futures contract of Stock A at ₹100, which expires at ₹120. If the lot size is 1,000 shares, the trader will be debited ₹1.2 lakh (₹120 × 1,000) and will receive 1,000 shares in their demat account. Similarly, a seller of that futures contract must deliver the shares to the buyer upon expiry.
This system ensures that both buyers and sellers have skin in the game, reducing excessive speculation and aligning derivative trades closer to real market supply-demand dynamics.
| Scenario | Trader’s Role | Settlement Outcome |
| Futures Buyer | Takes delivery | Shares credited; full value debited |
| Futures Seller | Delivers shares | Shares debited; value credited |
| Call Option Buyer (ITM) | Takes delivery | Receives shares at strike price |
| Call Option Seller (ITM) | Delivers shares | Delivers at strike price |
| Put Option Buyer (ITM) | Delivers shares | Sells shares at strike price |
| Put Option Seller (ITM) | Takes delivery | Buys shares at strike price |
Active derivatives traders often assess both margin and delivery obligations while following Nifty Option Tips to plan expiry strategies efficiently. Proper margin maintenance can help avoid interest or penalties levied by brokers during settlement periods.
Margin Requirements and Penalties
When initiating a futures contract, traders generally deposit around 15% of the contract value as margin. For example, buying one lot of 1,000 shares at ₹100 requires an initial margin of ₹15,000. However, if the contract moves toward physical delivery at expiry, the trader must maintain funds equivalent to the full settlement value—₹1.2 lakh in this example.
Failure to maintain sufficient margin may attract penalties or interest charges, depending on the broker’s policy. Similarly, sellers unable to deliver shares face penalties and potential auction losses if they default on obligations.
Impact on Options: ITM, ATM, and OTM
Physical settlement applies only to in-the-money (ITM) options. At-the-money (ATM) and out-of-money (OTM) options expire worthless. This means that only ITM options lead to actual stock delivery or receipt, depending on the type of position.
For ITM calls, the buyer takes delivery while the seller must deliver shares. For ITM puts, the buyer delivers shares and the seller must buy them. This mechanism enhances transparency and ties option trading more closely with real stock movements.
Commodity Snapshot: Gold and Silver Extend Gains
Gold and silver have continued their rally for the seventh consecutive week, driven by sustained demand and global uncertainty. Gold futures closed at ₹1,18,113 per 10 gm, up 2.75%, marking a new record high of ₹1,18,444 during the week. Silver futures surged 4.2% to ₹1,45,744/kg, also hitting an all-time high of ₹1,46,975 on Friday.
| Commodity | Current Price | Trend | Support | Target |
| Gold (Dec Futures) | ₹1,18,113 | Uptrend | ₹1,15,000 / ₹1,12,700 | ₹1,22,000–₹1,22,500 |
| Silver (Dec Futures) | ₹1,45,744 | Strong Bullish | ₹1,39,000 / ₹1,33,700 | ₹1,50,000 |
Gold’s momentum suggests potential for a breakout beyond ₹1,20,000, while silver’s rally appears supported by strong demand. Traders can consider long entries with disciplined stop-loss placement and trailing profits as targets approach.
Commodity traders aligning precious metal trades with macro indicators often rely on F&O Tips Today to refine entry and exit timing, especially in volatile segments like gold and crude oil.
Crude Oil: Weak Outlook Continues
Crude oil prices witnessed heavy selling last week, with Brent futures falling 6.8% to $64.50 per barrel. Domestic MCX crude oil futures (October) declined to ₹5,439, breaching a key support level at ₹5,500. The trend now appears bearish, with resistance near ₹5,600 and downside potential toward ₹5,000–₹4,800.
Trade Strategy: Short crude oil futures (October) at ₹5,450 and ₹5,550 with a stop-loss at ₹5,650. When the contract falls to ₹5,200, trail the stop-loss to ₹5,450 and exit at ₹5,000. Traders should monitor Brent cues for confirmation as international weakness continues to weigh on domestic prices.
Investor Takeaway
Physical settlement in derivatives has introduced accountability and reduced speculation, ensuring that only well-capitalized participants remain active near expiry. Commodity traders, on the other hand, continue to see opportunities in gold and silver, while crude oil weakness calls for a cautious short approach. Proper margin maintenance, disciplined exits, and respect for expiry dynamics are essential for successful F&O participation.
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SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
