The National Stock Exchange (NSE) has announced the removal of the “Do Not Exercise” (DNE) facility for Futures and Options (F&O) traders from 30th March 2023. This move is expected to have a negative impact on options trade volume as there will be no auto square-off facility available for stock option traders. In this article, you can read more about this development and its impact on the market for the UPSC exam Indian Economy segment.
What is the “Don’t Exercise” Facility?
The “Don’t Exercise” (DNE) facility is a feature in the Futures & Options (F&O) market that allows traders to avoid taking delivery of an option contract.
- This facility allows traders to exit their position without having to pay the full amount required for delivery of the contract.
- The F&O market is a segment of the Indian stock market where traders can buy and sell contracts that give them the right to buy or sell underlying assets such as stocks, indices, and commodities at a future date.
- The F&O market is regulated by the Securities and Exchange Board of India (SEBI), which sets the rules and regulations governing trading in this market.
- F&O contracts come with an expiry date, and traders can either settle their positions before the expiry date or let them expire.
- The F&O market allows traders to leverage their positions by trading on margin, which means that they can trade with only a fraction of the value of the underlying asset.
- The F&O market is popular among traders who are looking to hedge their risks or speculate on the future direction of the market.
- The F&O market is also used by institutional investors and fund managers to manage their portfolios and generate alpha.
- Some popular F&O contracts in India include Nifty 50, Bank Nifty, and stock futures and options of individual companies.
- The F&O market is known for its high volatility and risk, and traders need to have a good understanding of market dynamics and risk management strategies to be successful in this market.
How scrapping the DNE facility will impact the F&O market?
The removal of the DNE facility will affect the stock option traders, as they won’t have the auto square-off facility after the monthly option in the stock option trade ends.
- The settlement will now go into the cash delivery segment, and options traders will have to pay a high margin to take delivery. They may also face interest and penalty charges if they have taken a strike without having the full amount in their Demat account.
- The removal of the DNE facility will discourage high-risk option trades and push cash trades, which is good for low-risk traders and investors.
- Traders will have to square off their strikes earlier than the date of expiry to avoid their stock options strike going into delivery.
- If the trader wants to go into delivery, they should keep the full amount in their Demat account to avoid penalty and interest payment on the residue amount after the premium payments.
- The removal of the DNE facility will impact the option trade volume negatively.
- F&O traders will now have to pay the residual amount if they leave their position after the strike, and their position will go into delivery for settlement.
“Do Not Exercise” (DNE) Facility:- Download PDF Here
|Major Stock Exchanges in India||Topic-Wise GS 3 Questions from UPSC Mains|
|SEBI’s Regulatory Framework for Index Providers||Exchange-Traded Funds|
|UPSC Calendar 2023||Exchange-Traded Funds|