The move will enable traders to manage their risk better, especially when it comes to out-of-the-money contracts. It will allow them to close their open positions, preventing the risk associated with physical delivery, the stock exchange said in a circular on April 11.
Further, the system, which was introduced in 2017, was a fail-safe for options traders during the time of cash-settlement of options contracts. However, with the introduction of the physical delivery settlement, the system became redundant as the risk of paying securities transaction tax was no longer present.
Under the current system, it was mandatory for traders to either square off their existing in-the-money positions before the expiry of the contract or ensure physical delivery. The situation for a put option buyer holding in-the-money contracts at the time of the expiry was especially grim as he would have to buy the shares from the auction and deliver to the put writer.
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