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Key Factors You Should Know Before Taking Physical Delivery in F&O Trading

By: Akriti Tomar | Date : Nov 3, 25

What is Physical Delivery in Stock F&O?

In India, stock futures and “in-the-money” (ITM) stock option contracts must be settled via physical delivery at expiry. This means if you hold such positions through expiry, you must deliver or receive the actual shares. Options that are out-of-the-money (OTM) expire worthless and carry no delivery obligation.  For example:
  • Long futures / long ITM calls / short ITM puts → you take delivery (you receive shares). 
  • Short futures / short ITM calls / long ITM puts → you give delivery (you must deliver shares). 
  • Contracts in the same stock and same expiry may be netted off if they offset (e.g. long futures + short ITM call) and then physical obligations cancel out. 
 

Key Risks of Physical Settlement

 A) Insufficient Funds or Stock Holdings If you are required to take delivery but don’t have enough cash, or required to deliver but don’t have shares in your Demat Account, your broker may square off positions or enforce other penalties.  If your account goes into a debit (negative) due to lacking funds, you may be charged interest until cleared.  B) Unexpected OTM → ITM Conversion An option that was OTM earlier in the expiry week could move into ITM at the last moment. In that case, you may suddenly become liable for physical settlement obligations even if you did not anticipate it.  C) Short Delivery and Auction Penalties If you are required to deliver shares (short delivery) and you don’t have them, the remaining shares may be procured via auctions at unfavorable prices. You then incur auction penalties and extra costs.  D) Liquidity & Spreads Near Expiry Many traders exit positions before expiry to avoid delivery risk. As expiry approaches, liquidity often dries up, and bid–ask spreads widen, making trades more expensive or harder to execute. E) Operational & Settlement Complexity Physical delivery adds operational layers (e.g. Demat transfers, stock availability, auction processes). Especially for less liquid stocks, fulfilling delivery can be challenging.  

Example:- 

Imagine you held a call option which was OTM through most of the week. On expiry day, it edges into ITM by a small amount. You now have to take delivery of shares worth lakhs, even though your original premium was small. Some traders unable to bring funds or shares face brokerage square-offs or auction penalties.  

Summary Risk Table

 
Risk category Impact / consequence
Insufficient funds or stock Broker squares off or penalty
Margin escalation High capital needed near expiry
OTM → ITM conversion Sudden unplanned delivery obligations
Short delivery / auction Extra costs and losses due to auction
Liquidity issues Difficulty exiting/rolling positions near expiry
Operational complexity More execution overhead, risks with settlement
 

How to Manage These Risks?

  • Square off or roll over ITM / near-ITM positions well before expiry
  • Maintain buffer capital and extra shares in Demat to meet possible obligations
  • Avoid entering new long options in the last days, especially OTM ones
  • Understand your broker’s delivery and margin policy in advance
  • Watch SEBI & exchange rules for changes
  • Prefer cash settlement products (like index F&O) when you want to avoid delivery risk
 

Conclusion

Physical delivery of stock F&O brings significantly more risk—especially as expiry nears—to unprepared traders. Margin surges, mandatory delivery requirements, and auction penalties make it non-trivial. Planning ahead, avoiding risky expiry exposures, and ensuring sufficient funds/shares are key to mitigating these risks.  

Need Help?

For more details, contact RMoney at 0562-4266600 / 0562-7188900 or email askus@rmoneyindia.com Disclaimer: Investments are subject to market risks. This is educational content and not financial advice.

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