DO NOT EXERCISE FACILITY WILL BE WITHDRAWN FOR STOCK OPTIONS!
Investors trading in stock options will not be able to benefit from the ‘do not exercise’ (DNE) facility as the National Stock Exchange (NSE) has decided to withdraw the DNE facility from March 30th, 2023. In simple words, NSE has now made it mandatory for stock option holders who have not squared off their position before the date of expiry to take the physical settlement route.
The concept of DNE was initially introduced in 2017 but was later withdrawn by NSE in 2021. After huge losses suffered by stock option holders and continuous requests by the stakeholders, NSE re-introduced DNE on April 28th, 2022.
Briefly, investors who buy options have a right to buy stock, and traders who sell options have an obligation to sell on expiry. The settlement on the date of expiry was done in two ways - 1. Physical Settlement 2. Cash settlement.
Do not exercise/ DNE facility helps the investor instruct their brokers to opt for a cash settlement and escape the long physical settlement process.
Now it will become mandatory to either square off the position before expiry or ensure physical delivery at the time of expiry of the contract. The major disadvantage for the investor using stock options for speculation is that they must arrange for adequate funds to take the physical delivery and then sell the stock in the market.
The news of the withdrawal of DNE will majorly affect the stock options holders where out-of-the-money contracts became in-the-money contracts on the date of expiry.
DNE facility has been withdrawn only for stock option holders and not for index option holders.