Reintroducing Do Not Exercise (DNE) In Options3 min read
Hey option traders, we’ve some news for you. Do Not Exercise (DNE) is being reintroduced from April 28, 2022!
What Is Do Not Exercise (DNE)?
First, a little background.
Most of the traders trade in stock options without any intention of taking or giving physical delivery. But things get tough when In The Money (ITM) stock options loom!
‘Do Not Exercise’ allows a trader to instruct the broker if he/she does not wish to exercise the right to give or receive deliveries.
This will prevent the risks around the physical settlement and will allow brokers to stop exercising Close To Money (CTM) option strikes on behalf of clients.
Recently many traders were unable to exit positions before they expired, leading to physical settlement. If a trader doesn’t have enough money to take physical delivery or sufficient stocks in holding to give physical delivery, traders are forced to bear severe losses.
Understand With An Example
Many times, Out of The Money (OTM) options become In The Money (ITM) at the very last moment on expiry day.
For example, SBIN is trading at ₹492 and you have bought a 500 strike price call option for ₹3 of premium. As your option is Out of The Money (OTM) you don’t need to maintain the additional margin. But then comes the expiry day! There’s a sudden spike in the price and SBIN closes at ₹ 500.05. Your option becomes ITM as the stock price. What do you have to do now? You have to take physical delivery of ₹ 7,50,075 (1500 lot size X 500.05) worth shares of SBIN shares. If you don’t have sufficient balance in the account then this will be a problem for you and your broker.
Enter Do Not Exercise (DNE)!
After the market closes, brokers usually check clients’ free balance. Now, enter Do Not Exercise (DNE)! If the balance is less than the required balance to take physical delivery, the position will be marked as “Do not exercise” and the option contract will expire worthlessly.
How Will Do Not Exercise (DNE) Work?
This facility will be provided to specify ‘Do not Exercise’ instruction on expiry days in options contracts. On expiry day, brokers shall be given an option to specify not to exercise in respect of Close To Money (CTM) option strikes.
The Close To Money (CTM) strikes range shall be arrived at as under:
- For Call Options – 3 ITM options strikes immediately below the final settlement price shall be considered as ‘CTM’
- For Put Options – 3 ITM options strikes immediately above the final settlement price shall be considered as ‘CTM’.
Paytm Money Policies on Do Not Exercise (DNE)
- If you have In The Money (ITM) option and don’t have a sufficient balance as per the physical delivery rule, we will square off the position. Read the physical delivery blog post here.
- On expiry day, we will square off all the In The Money (ITM) open positions without considering the available margin.
- If any trader wants to take physical delivery, they will have to inform us over email. We send separate emails to all traders who have In The Money (ITM) open positions along with the process to take physical delivery.
- Many times, the Out of The Money (OTM) option becomes In The Money (ITM) at the very last moment on expiry day. These contracts will be marked as “Do not exercise” and the option contract will expire worthlessly.
In case you are interested, you can also refer to the 2017 circular – NSE and BSE and the 2022 circular of reintroduction of Do Not Exercise.
This content is purely for information and investor awareness purpose only and in no way an advice or recommendation. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707) Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019