Physical settlement means that a stock F&O position held open into expiry is settled with the actual shares. You give or take delivery of the full lot, and pay or receive its full value. This applies to stock derivatives only; index contracts like Nifty 50 options settle in cash, since an index has no shares to deliver.
What does this mean for me as a trader?
It means expiry is not just a date your position vanishes on. If you hold a stock futures contract, or an in-the-money stock option, through expiry, you have signed up for a real share transaction, often many times larger than the margin you traded with.
Which side of the delivery you're on depends on your position:
| Your position at expiry | What settlement requires of you |
|---|---|
| Long stock futures | Take delivery. Pay the full contract value, receive the shares |
| Short stock futures | Give delivery, deliver the full lot of shares |
| Long ITM call / short ITM put | Take delivery. Pay full value, receive shares |
| Long ITM put / short ITM call | Give delivery, deliver the full lot of shares |
Out-of-the-money options simply expire worthless, no delivery arises from them.
Let's trace what happens to Harpreet
Harpreet buys one lot (500 shares) of Sundar Textiles futures at ₹600, putting up roughly ₹60,000 as margin (illustrative). She gets busy during expiry week and forgets the position.
At expiry, the contract is physically settled. Harpreet is now obligated to buy 500 shares at the settlement price, a purchase of around ₹3,00,000. Her ₹60,000 margin doesn't cover that; she must bring in the full amount, or the shares bought on her behalf may be sold off to recover the shortfall, with any loss and charges falling to her account.
If she had instead been short an ITM call on a stock she didn't own, she'd owe delivery of 500 shares. Shares she'd have to buy in the market to deliver. Either direction, the sums involved dwarf the original margin.
Because delivery obligations are so much larger than trading margins, brokers and exchanges sharply increase margin requirements on stock F&O positions as expiry approaches, typically stepping them up through expiry week for contracts likely to result in delivery. The exact schedule and percentages vary and are revised from time to time. Expect your margin requirement to climb in expiry week, and check current requirements before holding through it.
The simplest way to avoid all of this: square off or roll over before expiry. For the expiry-day sequence itself, see What happens on expiry day?, and for the clearing-side mechanics of how F&O obligations are computed and settled, see How are F&O trades settled?, which covers that end of the pipeline.
Things to keep in mind
- Holding stock F&O into expiry can commit you to a delivery worth the full contract value, the single most expensive surprise in beginner derivatives trading; see What are the risks of trading Futures and Options (F&O)?
- Margins on stock F&O rise in expiry week; a position comfortably funded on Monday can face a margin shortfall by Thursday.
- "Slightly ITM at 3 pm" can become delivery by close, settlement uses the computed closing price, not the last tick you saw.
- If you don't intend to give or take delivery, square off or roll over well before expiry day.
Read next
What are the trading restrictions during an F&O ban? — A restriction that catches traders mid-position if they are not watching for it.