Can DNE removal curtail speculative options trading?

Is DNE beneficial? , How A Trade Closes Without DNE?

• DNE prevented the risks around the physical settlement

• It allowed brokers to stop exercising CTM option strikes on behalf of traders

• It facilitated traders to instruct brokers that they don’t wish to exercise the right to give or receive deliveries

• Now, the stock settlement will be done under the cash delivery segment

• Options traders will have to pay the required margin to take delivery

• The margin will be high as options traders will have to pay interest and penalty in case they built-up position without equipping their demat account with the full amount

• Traders can’t avail of auto square-off facility

• Traders will face a huge risk of settling their trade with shares if they’re unable to close open positions on March 29 in individual stock options contracts

Do Not Exercise (DNE)

• It’s introduced in 2019, discontinued in 2021 and again reintroduced in April 2022

• Mkts closed on March 30 (Thu) for Sri Ram Navami

• Hence, the weekly & March series expiry will be on Wed

• It’s the last official session for DNE

Hyderabad: Brokers and investors are expressing mixed views over the scrapping of the ‘Do Not Exercise’ (DNE) facility by NSE. The DNE facility has been a fail-safe for options traders during cash settlement of the options contracts, particularly on expiry day.

Stock market experts feel the discontinuation will have a negative impact on options trade volume as traders won’t have an auto square-off facility after the end of monthly options in a stock options trade.

The discontinuation of DNE will discourage high-risk options trade and push cash trade, which is good for low-risk traders and investors.

However, options traders if they don’t close their open positions on March 29, which is the last expiry session with DNE, in individual stock options contracts, will have to face a huge risk of settling trade with shares.

A section of brokers opines that DNE removal would create a potential risk of loss for both brokers and options traders, while the Association of National Exchanges Members of India (Anmi) welcomed the move.

Brokers said that it would result in high losses for retail investors, especially in buying options, if OTM options become ITM and there’s no liquidity to exit.

NSE introduced DNE facility enabling brokers to stop the exercise of the options on behalf of clients.

If the Put option expires In The Money (ITM), then the seller has an obligation to take the delivery, whereas, with the Call option, the seller has an obligation to give the delivery if the option expires ITM.

Explaining the trading dynamics without DNE, Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, said: “Let’s understand this with an example, Reliance settlement price on expiry is Rs2,241, where a Call seller with a strike price of Rs2,240 now has an obligation to give physical delivery on his outstanding position for the same strike. There is a gap between buyer and seller in ITM, which is again a loss for a trader, who is forced to close the trade in fear of a physical settlement before expiry. On the other hand, the broker can’t force the options trader to close his position or square off on its own, he can only inform the client of his position or ask for the margins. In many cases, the ATM (At The Money) or slight OTM (Out of The Money) options prices are settled in ITM. Even if the option is closed by 5 paise in the money, the physical settlement comes into the picture. Many times, traders expect that the option is OTM or ATM, but later in some cases, the settlement prices make that option ITM. In the absence of the physical stock where he has to give delivery, one has to go to auction, which again creates a huge loss.”

However, responding positively to the decision on the removal of DNE, Anmi said it would curtail unwanted speculation in the market.

“The removal of DNE option will majorly affect the speculators, who trade on huge volumes and particularly on expiry day. I don’t think retail investors would be affected badly. It’s a good move from the NSE,” Kota Srinivasa Rao, director (National Council), Anmi, told Bizz Buzz.

On the other hand, the removal of DNE will discourage high-risk trades that attempt in selling ITM/ATM options and push those traders towards investing or equity trading, remarked Bisht.