Stock Options (India)
Exchange-traded options on individual NSE-listed stocks in India, subject to SEBI-mandated physical settlement rules and standardised lot sizes, distinct from index options which remain cash-settled.
SEBI introduced physical settlement of stock derivatives in a phased manner starting in 2018-19, completing the transition by October 2019. Under physical settlement, holders of in-the-money stock options on expiry day were required to give or take delivery of the underlying shares rather than receiving a cash differential. This fundamentally changed risk management requirements for stock option participants compared to the era of cash settlement.
Each stock option contract on NSE had a standardised lot size that NSE periodically revised to maintain notional value within acceptable ranges. Lot sizes differed widely: a Reliance Industries option lot was historically 250 shares while a smaller company might have a lot of 1,000 or more shares. This meant that the rupee value of a single lot varied considerably across stocks.
NSE maintained an approved list of stocks eligible for derivatives, based on criteria including minimum free-float market capitalisation, median quarter-sigma order size, and average daily delivery value. Stocks that fell below these criteria were removed from the F&O segment. This created what traders called the F&O ban period, which was different from the margin-based F&O ban for positions exceeding market-wide position limits.
Physical settlement created a tight arbitrage linkage between stock option prices and spot prices near expiry. In-the-money calls near expiry historically priced close to their intrinsic value because they would convert into share delivery obligations. Traders holding deep in-the-money calls and not wishing to take delivery had to roll positions before expiry, creating distinctive pre-expiry rollover patterns.
Stock options in India were predominantly European-style, meaning exercise was only possible on the expiry day rather than at any point during the contract life. This contrasted with US equity options, which were American-style and could be exercised early, and was a relevant distinction for pricing models applied by participants.