Someone buys one lot of a call option on a large IT company. The premium costs a few thousand rupees, which is all they think they have at risk.
The stock goes nowhere all week, and the option stays out of the money. Then, on expiry day, the stock rises and the option finishes just in the money. Because it is a stock option, it is automatically exercised, creating a physical-delivery obligation far larger than the premium they paid.
They are not watching. Until that afternoon the option was out of the money, so no delivery margin was ever collected and nothing looked wrong.
After expiry, they discover that they need to fund several lakh rupees for shares they never planned to buy.
Nothing went wrong. This is how the contract was designed to settle. This post explains what happens when F&O contracts expire, because these rules can be expensive to learn by accident.
Two kinds of settlement, and only one is gentle
Index derivatives are cash settled. If you hold a Nifty or Sensex contract until expiry, the difference between your position and the final settlement price is credited or debited to your account. No shares are delivered.
Stock derivatives are physically settled. If you hold a stock future or an in-the-money stock option until expiry, the position can result in actual shares being delivered.
For futures, a long position means buying the shares and paying for them, while a short position means delivering the shares. For options, a long call can result in buying shares, while a short call can result in delivering them. A long put can result in delivering shares, while a short put can result in buying them.
The important point is simple: an in-the-money stock option can turn a relatively small premium into a much larger funds-or-shares obligation at expiry.
This has been compulsory since October 2019, following a SEBI circular in April 2018 that phased it in. The move was intended to improve market integrity and bring the cash and derivatives segments of the market into closer alignment.
Two things follow that people routinely miss.
Indian stock options are European style, meaning they can be exercised only at expiry. In-the-money stock options are automatically exercised under the applicable exchange rules. An out-of-the-money option expires worthless.
So the risky position is not always the one that loses. A small in-the-money position can create a large delivery obligation.
The week before expiry
The system can warn you through a rising delivery-margin requirement.
For positions heading into physical settlement, delivery margin is collected in stages during the four trading days before expiry. It rises from 10% at E-4 to 25% at E-3, 45% at E-2, 70% at E-1 and 100% on expiry day, based on the applicable margin requirement.
The calculation is based on the applicable margin requirements in the cash market for the stock. That can make the required margin much larger than the margin you originally posted to open the position.
If you have been trading a ₹15 lakh contract on a margin of ₹3 lakh or so, that rising requirement is the system signalling that the position is approaching physical settlement. What feels like an unexplained margin call is often the delivery requirement arriving in stages.
Open stock option positions that are in the money may be squared off on expiry day if the funds or shares needed for delivery are not in your account. Delivery is allowed on CNC / Carry forward.
If delivery happens, there may be additional costs. These can include brokerage, depository charges and stamp duty, depending on the broker and transaction.
If you cannot deliver shares when required, the exchange may arrange the purchase through an auction and apply the applicable costs and penalties.
Two details are worth knowing. If your positions in the same stock create matching obligations to receive and deliver shares, those obligations can be netted rather than requiring both sides to be delivered separately.
Also, expiry day and settlement day are not necessarily the same thing. Expiry determines the final obligation; the actual funds and securities are settled according to the applicable clearing and settlement schedule.
Have a question about an expiring position? Talk to the Hem Nxt team
The simplest rule in derivatives
Close stock option and stock futures positions before expiry unless you have deliberately decided to take delivery and have the required money or shares ready.
Not on expiry day. Before it.
Index positions do not create the same physical-delivery obligation. That is the key settlement difference between index and stock derivatives.
Rolling over instead of closing
Contracts are available across different expiry months. At a given time, there can be near-month, next-month and far-month contracts for the same underlying.
If you want to keep a position beyond expiry, you do not extend the same contract. You close the expiring contract and open the next contract. This is called rolling over. The price difference between the two contracts is part of the cost or benefit of rolling the position. Depending on the relative prices, the next-month contract can be more expensive or cheaper than the expiring one.
Rollover activity in the days before expiry is also watched as a signal, because whether traders are carrying positions forward or letting them go says something about conviction.
When a stock gets banned
You may sometimes be told that a stock is in an F&O ban period. This does not mean the company itself is banned. It means derivative positions in the stock have reached the applicable market-wide position limit.
Each eligible stock has a market-wide position limit, or MWPL, which sets the maximum permitted derivative exposure. Under the framework revised from October 2025, the limit is linked to the stock's free float and its average daily delivery value.
When the relevant derivative exposure reaches 95% of the permitted limit, the stock enters an F&O ban period. The calculation uses a delta-adjusted measure called Future Equivalent (FutEq), rather than simply counting the number of contracts.
During a ban, traders can generally take actions that reduce their exposure, but cannot increase their net exposure. The exact orders permitted depend on the applicable exchange rules.
The ban is lifted when the exposure falls below the applicable exit threshold. Ban status can change frequently, so check the current exchange ban list before planning a trade in a stock with high derivative activity.
Expiry day itself
Expiry day depends on the exchange and the particular contract. On NSE, current equity-derivatives contracts expire on Tuesday. BSE contracts follow the expiry day specified in their respective contract specifications. Monthly contracts generally expire on the specified monthly expiry day, with the expiry moved earlier when the scheduled day is a trading holiday.
Weekly contracts are currently available for Nifty 50 options at NSE and Sensex options at BSE. Bank Nifty options currently have monthly and quarterly expiries at NSE.
One recent change matters on expiry day. Since August 2026, the cash market for stocks with derivative contracts moves from continuous trading into a separate closing-auction session beginning at 3:15 pm. The auction runs until 3:35 pm, while the equity-derivatives segment continues trading until 3:40 pm.
If your habit was to square off a position in the last few minutes of the trading day, the cash-market closing process is now different. Do not assume that you can use those final minutes in the same way as before.
If you are just starting out
Three things matter most, in order of how much they can cost you.
First, know whether your contract is cash settled or physically settled. In simple terms: index derivatives are cash settled, while stock derivatives can result in delivery of shares.
Treat a small in-the-money stock derivative near expiry seriously because it can create a delivery obligation.
Where you do not intend to take delivery, closing the position before expiry can help you avoid an unwanted delivery obligation.
Common questions
What is physical settlement in F&O?
The delivery of actual shares when a stock derivative reaches expiry, rather than a cash adjustment. It has been compulsory for all stock futures and options in India since October 2019.
Are index options physically settled?
No. Nifty, Sensex and other index derivatives are cash settled, so no shares change hands.
What happens if I forget to square off before expiry?
An out-of-the-money option expires worthless. An in-the-money stock option is subject to automatic exercise and can result in physical delivery, while a stock futures position is settled through delivery. Depending on the position, this can mean paying for shares or delivering them. Brokers may square off positions before expiry according to their own risk policies, but you should never assume they will do so.
Why did my margin requirement jump before expiry?
Because delivery margin is collected in stages over the four trading days before expiry, reaching the full amount on expiry day. It is based on the margin the stock would need in the cash market, which is usually much higher than the margin you posted to open the position.
What is rollover in futures?
Closing your position in the expiring contract and opening the same position in the next contract, so the exposure continues. The difference in price between the two contracts is part of the cost or benefit of rolling the position.
What does the F&O ban mean?
It means the relevant derivative exposure in a stock has reached 95% of its permitted market-wide position limit. The calculation uses a delta-adjusted Future Equivalent measure. During the ban, you cannot increase your net exposure, although you can take permitted actions to reduce it. The ban ends when the exposure falls below the applicable exit threshold.
Does a ban stop me from buying the shares?
No. It applies only to futures and options. The cash market is unaffected.
When do F&O contracts expire?
It depends on the exchange and the contract. On NSE, current equity-derivatives contracts expire on Tuesday, with expiry moving to the previous trading day if Tuesday is a trading holiday. BSE contracts follow the expiry schedule specified for the particular contract.
The short version
Index derivatives are settled in cash. Stock derivatives can be settled through delivery of shares.
That distinction explains most of what makes expiry risky. If you do not intend to take delivery, the simplest way to avoid an unwanted delivery obligation is to close the stock F&O position before expiry, in accordance with your broker's cut-off and risk policies.
Risk disclosure
Hem Finlease Private Limited, SEBI Registration No. INZ000167734. Hem Securities Limited, SEBI Reg. No. IN-DP-568-2021, CDSL: 17700/17701.
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI and membership of recognised stock exchanges do not guarantee the performance of the intermediary or provide any assurance of returns to investors.
Risk disclosure on derivatives, based on SEBI's study of individual traders in the equity Futures and Options segment:
9 out of 10 individual traders in the equity Futures and Options segment incurred net losses.
On an average, loss-makers registered net trading losses close to ₹50,000.
Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
Those making net trading profits incurred between 15% to 50% of such profits as transaction cost.
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