What is Do Not Exercise (DNE) in NSE

To understand the context of DNE, it’s important to look at how the NSE gradually shifted towards physical settlement of stock options:

In April 2018, NSE rolled out the physical settlement framework in a phased manner for equity derivatives. With physical delivery came a need to manage ITM options that were only marginally profitable, or what’s known as "close-to-money" (CTM) options. Exercising such options could sometimes result in a loss due to brokerage costs, taxes, or margin obligations. To tackle this,a Do Not Exercise (DNE) mechanism was enabled at the broker level under NSE’s framework, allowing them to flag specific CTM options to avoid exercise and prevent physical delivery obligations.

While several brokers used the DNE mechanism during expiry, its availability and usage varied, and it was not a standard feature accessible to all retail traders or platforms.

The DNE facility was particularly useful in scenarios where the cost of exercising an ITM option outweighed the benefit. Here’s how the mechanism functioned:

• Brokers would receive the list of CTM contracts post-market close on expiry day.
  

• If a trader did not wish to take delivery (or give delivery in the case of writing a call), they could instruct their broker to mark those options under DNE.
  

• The broker would then notify the exchange via the approved channel within the given cut-off timeline.
  

• Once accepted, NSE would treat those positions as not exercised, and they would expire worthless — avoiding physical settlement and related obligations.
  

This process gave more control to traders during expiry, especially those who were not prepared to manage sudden delivery obligations.

The primary objective of DNE was risk mitigation. With the shift to physical delivery, traders were exposed to potentially large financial obligations if their CTM options were automatically exercised. For instance, carrying forward even a single lot of ITM stock options could translate to obligations worth several lakhs, depending on the stock price.

Other reasons for its introduction included:

• STT implications: Exercising an ITM option attracted higher Securities Transaction Tax (STT) compared to letting it expire.
  

• Margin safety: It prevented margin shortfalls and associated penalties for traders who could not fulfil delivery requirements.
  

• Broker risk control: It also allowed brokers to manage client positions and mitigate settlement failures.

On 29th March 2023, NSE issued a circular announcing the withdrawal of the DNE facility for stock options. This marked a significant change in the operational dynamics of equity derivatives.

As per the circular:

• All ITM stock options would now be mandatorily exercised at expiry.
  

• Traders would have to ensure they had the margin or securities available to handle physical delivery.
  

• There would be no option to prevent the exercise of CTM options, regardless of the potential financial outcome.
  

The exchange justified the move as a part of simplifying and standardising the settlement mechanism, aligning it more closely with global practices.

With the removal of the DNE facility, traders must now handle all ITM positions with greater diligence. Some of the key implications include:

• No opt-out mechanism: All ITM options are automatically exercised, increasing the possibility of delivery-related obligations.
  

• Increased margin pressure: Traders need to maintain sufficient funds or securities to honour delivery, or face penalties.
  

• Physical delivery compliance: The risk of defaulting on settlement increases if positions are not squared off in time.
  

• Higher risk near expiry: Traders need to monitor their positions more closely on expiry day, especially for options that move ITM in the last few minutes of trade.
  

This shift has made expiry day trading more complex and risk-laden for those who previously relied on DNE as a safety net.

In the absence of DNE, traders can still take several steps to manage their risk more effectively:

• Square off positions before expiry: This ensures there's no risk of unintended physical delivery.
  

• Monitor ITM transitions: Keep a close watch on options that are near the strike price, especially during the last 30 minutes of trading.
  

• Use margin calculators: Advanced tools offered by brokers help in forecasting potential obligations based on position and volatility.
  

• Follow conservative strategies: Especially near expiry, where risk is amplified by potential ITM movement.
  

• Set alerts for price movements: This can help you act quickly before an option moves deep ITM and becomes subject to delivery.
  

These practices allow traders to stay proactive and maintain control even without the safety net DNE once provided.

As of now, the DNE facility is no longer active on NSE. There is no known replacement that allows similar opt-out flexibility for stock options. Traders and brokers must operate with the understanding that all ITM stock options will be physically settled unless squared off in advance.

The exchange has shifted focus towards reinforcing better risk management among traders, rather than providing opt-out mechanisms for settlement obligations.

The Do Not Exercise (DNE) facility once provided critical flexibility to traders navigating the transition to physical settlement. Its removal signals a more disciplined and standardised options market, but also places greater responsibility on traders to manage risk proactively. Understanding DNE’s purpose and its withdrawal helps current and new market participants stay informed and aligned with evolving trading practices.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.