Delivery margins
Margins levied on potential in-the-money long option positions and deliverable futures positions in the run-up to expiry, staggered from 20% four days before expiry to 80% one day before.
In plain language
Some derivative contracts end in physical delivery of shares, not cash. Before that happens, the clearing corporation wants proof the buyer can pay and the seller can deliver. It does not wait for expiry day to check this. It starts collecting money well before that, in stages.
This staged collection is called delivery margins. It is charged on whichever is lower: the client's likely deliverable position, or their in-the-money long option positions. The amount builds up step by step as expiry gets closer.
How it works
Chapter 7 sets out the staggered collection, based on the position four days before expiry onward. If expiry is on a Thursday, delivery margins on potential in-the-money long option positions start applying from the end of day of the previous Friday — that is, from Expiry minus 4:
| Timing | Delivery margin collected |
|---|---|
| Expiry − 4, end of day | 20% of the computed delivery margin |
| Expiry − 3, end of day | 40% |
| Expiry − 2, end of day | 60% |
| Expiry − 1, end of day | 80% |
Delivery margins are part of the clearing member's initial margin, computed at client level for all positions that will settle by delivery; in-the-money status is judged daily on the underlying's closing price in the Capital Market segment. They are collected from the clearing member in this staggered manner and released on completion of settlement. Positions with early pay-in of securities or funds are exempt from delivery margins. Once a position converts to delivery settlement after expiry, it instead attracts the Capital Market segment's VaR, Extreme Loss and Mark-to-Market margins.
A worked example
A stock option contract expires on Thursday, 30 May. A client holds an in-the-money long call that the clearing corporation has assessed will require Rs 10,00,000 to be blocked as delivery margin once fully phased in.
| Day | Delivery margin blocked |
|---|---|
| Friday, 24 May (Expiry − 4) | 20% x 10,00,000 = Rs 2,00,000 |
| Monday, 27 May (Expiry − 3) | 40% x 10,00,000 = Rs 4,00,000 |
| Tuesday, 28 May (Expiry − 2) | 60% x 10,00,000 = Rs 6,00,000 |
| Wednesday, 29 May (Expiry − 1) | 80% x 10,00,000 = Rs 8,00,000 |
If the client instead makes an early pay-in of the required funds before expiry, this position is exempt from delivery margins altogether.
Why NISM asks about it
Chapter 7 sets out delivery margins, their staggered 20/40/60/80% schedule counting back from expiry, and their exemption for early pay-in. Expect a question on the percentage applicable a given number of days before expiry, or on what exempts a position from delivery margins.
Common exam traps
- The staggering counts backward from expiry: 20% at Expiry − 4 rising to 80% at Expiry − 1 — not the other way round.
- Delivery margins are part of initial margin, computed at client level, not a separate standalone margin category.
- Early pay-in of securities or funds exempts a position from delivery margins — this is the one carve-out the workbook gives.
- After expiry, a position converted to delivery is margined under Capital Market segment rules (VaR, Extreme Loss, MTM), not under the delivery-margin schedule any more.
Check yourself
1.What is the current status of the Short Option Minimum Charge in the equity derivatives segment?
- a)It applies to all short option positions at 2% of contract value
- b)It applies only to short options on expiry day
- c)It has been replaced by the delivery margin
- d)SEBI did away with it vide its circular dated 24 February 2020
Show the answer
Answer: (d) SEBI did away with it vide its circular dated 24 February 2020
The workbook: the Short Option Minimum Charge was a margin to cover the risk associated with short option positions in extremely deep-out-of-the-money strikes. SEBI has recently done away with the concept of short option minimum charge, vide its circular dated February 24, 2020.
Option A invents a rate. Option B confuses it with the additional 2% extreme loss margin on short options on expiry days (from 20 November 2024). Option C is wrong: delivery margins are a separate margin levied on potential deliverable positions or ITM long option positions four days prior to expiry of physically settled contracts.
Where this is taught
Free preparation for NISM Series VIIIRelated terms
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Exercise settlement valueThe intrinsic value of an option at expiry or exercise — the final settlement price of the underlying minus the strike for a call, or the strike minus that price for a put.
- Physical settlementSettling a derivative on expiry by actual delivery of the underlying shares against payment. In India, all stock futures and options open at expiry have been physically settled since October 2019.