Understanding the Do Not Exercise Option: Mechanisms and Implications
23-03-2023
The National Stock Exchange of India has discontinued the 'Do Not Exercise' facility for stock options on the expiry date, effective from the March 2023 expiry of F&O contracts.
The 'Do Not Exercise' facility allowed a trader to instruct the broker if he/she does not wish to exercise the right to give or receive deliveries.
Now that the facility has been removed, this shall result in compulsory physical delivery of shares if an option contract becomes in the money (ITM), and that contract has not been squared off on the expiry day.
The option contract is considered to be in-the-money (ITM) if the price of the underlying asset has surpassed the strike price of the option.
Traders will now have to watch their screens closely in the last hour of expiry day volatility and manually square off positions on time or they will end up getting delivery of the shares.
Traders may have to put in more margin money to hold the positions where the underlying asset's price is close to the contract's strike price in the last week of expiry.
The removal of the Do Not Exercise option forcefully converted the 'right' of the buyer to an 'obligation', leading to traders having to take delivery or give delivery of shares depending on the kind of contracts they have bought or sold.
The removal of the Do Not Exercise option has significant implications for traders and brokers alike, with brokers having to square off the positions of customers beforehand, any lapse of which will lead to auctions that customers won't bear.