India’s National Stock Exchange (NSE) has announced that it will withdraw the ‘Do Not Exercise’ (DNE) facility in stock options from March 30. The facility will continue to remain open for F&O trades in Index Options. With this new rule, brokers will not be able to close option contracts of clients for stock options from the next month.
The ‘Do Not Exercise’ facility offers safety to options traders who do not wish to take delivery during the settlement of options contracts. The DNE facility allows a client to instruct his/her broker that they don’t intend to receive the delivery. The facility lets brokers stop the Close To Money (CTM) option strikes on behalf of the clients as reported by Business Today.
With the absence of the DNE facility, stock options if not exited before the time of settlement will be settled in cash and the trader will have to pay for the required delivery. Failing to do so, traders will be charged a penalty and also have to pay interest if an option strike is triggered without sufficient balance in their trading account. This could have an impact on the volume of options trading as it increases the traders' exposure to risk. Zerodha co-founder Nithin Kamath had said, "With mandatory removal of DNE (especially buy options), the risk of huge losses has gone up significantly if OTM options become ITM and there's no liquidity to exit."
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