NSE REINTRODUCES DO NOT EXERCISE INSTRUCTIONS; TO MINIMIZE LOSSES WHEN TRADING OPTIONS

GET THE BEST TRADING TIPS ON YOUR WHATSAPP !!!! FOR THE DETAILS WHATSAPP  YOUR NAME & SEGMENT ON 9039542248

The National Stock Exchange will reintroduce a ‘Do Not Exercise’ (DNE) stock option instruction from April 28, 2022 onwards. With the reintroduction of this DNE instruction, a stock market investor can now minimise his/her loss and eliminate the risk of a physical delivery to a certain extent.  Let’s find out more about how this DNE instruction can help an investor minimise a potential loss in a stock option trade and also help eliminate physical delivery risk up to a certain extent. DNE was first introduced in 2017 when the Securities Transaction Tax (STT) used to be charged for the entire contract value, unlike today, where it is charged for the option premium value. By using a DNE instruction, clients could tell their brokers not to exercise the option strike price if the STT amount was greater than the premium value of the respective option contract. But it was discontinued in October 2021 as the STT tax law changed.

What Makes DNE Option Feasible?

On march 31,2022 , the shares of Hindalco closed at Rs 449.65. This meant every long put holder of the Hindalco 450 PE option contract who did not settle his trade before expiry had to deliver the shares mandatorily. One lot of Hindalco 450 PE had 1,075 shares, so the total value of one lot was Rs 449.65*1,075=4,83,373.75. So, either the holders of this put option had to give this amount of money in cash to their brokers, or, they could default, and then this would create a systematic risk for the broker’s operation.

Let’s say for instance that Hindalco is trading at Rs 450. Assuming the monthly stock put option Hindalco 450 PE is trading at Rs 1.2 strike price (the price at which the put or call option can be exercised) for 1 lot (1075 shares), so the money required to buy this option will be Rs1.2*1,075=Rs1,290. The broker will need to collect Rs 1,290 for this trade from you. But if you fail to close this trade before the option expires, then you will have to pay Rs450*1,075=Rs 4,83,750 (assuming Hindalco stock is trading at Rs450/share) at the contract expiry.

Most stock brokers do not allow leverage trading in options, and hence collect the full option premium price upfront. Now, if a large number of clients default on their obligations to pay for their option contract, then it could create a ripple effect in the market. This is why implementing a DNE instruction could help minimise this risk of default, and protect brokers, investors, and other stakeholders.

 The National Stock Exchange will reintroduce a Do Not Exercise (DNE) stock option instruction effective April 28, 2022. With the reintroduction of this DNE instruction, a stock market investor can now minimize their loss and to some extent eliminate the risk of physical delivery. Let's learn more about how this DNE statement can help an investor minimize and also eliminate a potential loss in a stock options trade

DNE Removal Challenges

DNE removal in October 2021 created a physical delivery risk. For example, if a customer fails to settle his options contract before expiration, he would be required to accept or deliver the relevant shares, whether or not he has sufficient funds in his account. If an option contract is held until expiration, then it must be settled by physical delivery, i.e. the shares are moved to the Demat account after the full value of the shares has been paid in cash. If the options contract is settled prior to expiration, no further settlement is required. If the customer holds the contract to expiration and has no cash or files for bankruptcy, there is a default of contract and legal action and a host of other processes follow. However, the money must be paid for the shares regardless of whether the client has the cash or not, since they did not sell the options contract before it expired. In 2019, the Securities and Exchange Board of India (Sebi) mandated that all options contracts be physically settled. DNE was first introduced in 2017 when the Securities Transaction Tax (STT) used to be levied on the entire contract value as opposed to today where it is levied on the value of the option premium. By using a DNE instruction, clients could tell their brokers not to exercise the option's strike price if the STT amount was greater than the premium value of the particular options contract. However, it was discontinued in October 2021 when the STT tax law changed.