Withdrawal of DNE facility to hit F&O volumes
This can lead to huge losses on the expiry day. This will impact volumes in the F&O segment,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.
Published: 24th March 2023 09:50 AM | Last Updated: 24th March 2023 09:50 AM | A+A A-
Image used for representational purpose only. (Photo | AP)
MUMBAI: Stock market’s Future & Option (F&O) traders will have to tread with caution from the next financial year as the National Stock Exchange (NSE) has decided to withdraw the ‘Do Not Exercise’ (DNE) facility for them from March 30.
Experts say that the discontinuation will have a negative impact on options trade volume as traders won’t have an auto square-off facility after the end of monthly options in a stock options trade. “The DNE facility gave the trader the freedom not to exercise the option to give/receive delivery which encouraged trading. With the withdrawal of the DNE facility, the auto-square-off facility will not be available.
This can lead to huge losses on the expiry day. This will impact volumes in the F&O segment,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.
Under the DNE facility, the traders in stock options can give instructions to their brokers not to exercise the option and instead automatically square off their out-of-money positions. In a circular dated 20 January, the exchange had informed that the facility would be withdrawn effective from March 2023 expiry of F&O contracts. As stock markets will be closed on 30 March on the occasion of Ram Navami, 29 March will be the last official date for the DNE facility.
After the withdrawal of this facility, traders will have to physically settle their ‘In The Money (ITM)’ options at expiry which means that if traders do not have the required numbers of shares to honour the contract, they would go to the auction market for purchasing it. At the auction, they might have to buy the required number of shares at higher prices leading to huge losses beyond their premium money. Currently, derivative positions are physically settled on the expiry day.
The NSE had reintroduced the DNE facility in stock options from April 28, 2022, after discontinuing this facility in October 2021. First introduced in 2017, the DNE facility was originally conceived as a foolproof system for options traders during the time of cash settlement of options contracts.
