Do not Exercise (DNE) facility for stock option traders is finally back. NSE (National Stock Exchange) clearing in a circular issued on Monday had announced that DNE will be available from April 28, 2022. NSE clearing circular said, “It may be noted that facility to specify ‘Do Not Exercise’ instruction on expiry day will be re-introduced in the Stock Option contracts with effect from April 28”.

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As per sources aware of the development, SEBIs (Securities and Exchange Board of India) Risk Management and Review Committee in its meeting in January this year had recommended for re-introduction of DNE. DNE will be allowed up to 3 strike prices of the stock option.

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As per the circular for Call Options, 3 ITM (In the money) options strike immediately below the final settlement price shall be considered as ‘CTM’ (Close to the Money)  and for Put Options, 3 ITM options strike immediately above the final settlement price shall be considered as ‘CTM’.

Zee Business had reported in January that the DNE facility will be brought back and on Friday reported that circular may come soon as SEBI has given a green signal. 

In the December expiry contract, one incident in Hindalco shares led to the concern of big risk for traders and brokers, many traders, who could not sell their position in Hindalco Put, suffered huge losses, due to the non-availability of DNE.

Traders, earlier had the maximum risk of losing only their premium money, were forced to buy the shares in the auction and settle the trade. The concern post Hindalco episode was discussed in the Risk Management and Review Committee, stakeholders pointed to the huge risk for brokers and the system in case traders’ default is high.

Thereafter a subgroup was formed to study the international practices and suggest measures. SEBI suggested Exchanges and Clearing Corporations to re-introduce the DNE facility after consulting with all the stakeholders. 

Brokers and market participants had been demanding to the SEBI to re-introduce DNE option in Close to the Money (CTM) Option contracts. After the removal of Do Not Exercise it was obligatory for all the options holders to compulsorily take or give delivery of their options even if they were slightly in the money.

Thus, the holder of the Put option which was slightly in the money was forced to give the delivery of the underlying share, while the holder of the call option which was slightly in the money was forced to cough up the entire purchase consideration and compulsorily take delivery.

DNE was introduced in August 2017 by exchanges option contracts, but NSE Clearing Limited had issued a circular on September 29, 2021, alerting its members that the DNE option will not be available from October 14, 2021, but many traders were not aware of the new circular and assumed that DNE was available to them.

The October circular mandated that from November expiry, if the spot price of a share closes below the strike price, then the trader holding the Put option of stock will have to either sell his position before expiry or arrange shares from the auction. 

In layman’s language, an Option is a contract that gives a trader the right but not the obligation to buy or sell a share at a particular date at a specified price. In the Call option, the trader gets the right but not the obligation to buy the stock at a specified date and price.

Buyer of a Call Option profits when the price of the stock goes up and loses when the stock price goes down. Similarly, the Put Option gives the right but not the obligation to sell a particular stock at a specified date and price.

The pre-decided price at which the buyer of the Put option can sell the underlying security is termed as the strike price. To buy the Option, there is a price to be paid which is called a premium. It is the income received by the seller of an option contract.

DNE was earlier removed for two reasons, one was to give a level playing field for option writers who could be left with unplanned overnight exposure when the option holder chooses to not exercise the option, and secondly the fact that the DNE was introduced to resolve the anomaly of excessive STT in the era where all the derivatives contracts were cash-settled.

Operational issues were also there, the extra processing due to DNE used to delay the Clearing Corporations process leading to complaints from participants.