Physical settlement of Future has not the big effect. We can roll over easily.
Physical settlement for Option is a very bad idea for Option Writers.
After expiry, you can see lots of pending orders around Rs 0.05 remained in the system unexecuted. Practically it is not actually possible to square off all huge positions written by options writers in last few days of expiry. We can see the wide bid-ask difference in most of the low liquid stocks in last 2-3 days of expiry.
Option writers don't used to square off far OTM strikes. Why SEBI is forcing us to square off an option which is going to Zero?
If writing position is huge and there will be a significant impact cost to square off all the position before expiry. There are not enough buyers near expiry to square off all OTM option writers position.
If option writers skip from such low liquid physically settled stocks, then volumes will be dried up quickly. Just wait and watch the fate of such 46 physically settle low liquid stocks. Within next 2 years, most of them would be out of F&O list. Actually, SEBI wants to reduce F&O list significantly.
AS PER SEBI REPORT,
SEBI INTRODUCED PHYSICAL SETTLEMENT AS PUNISHMENT ON 46 LOW LIQUID STOCKS WHICH DON'T MEET MIN VOLUME/TURNOVER CRITERIA. So, is that good to punish top performers like Reliance, TCS, SBIN etc with same logic in upcoming days?!!
A 'punishment' in a phased manner from the last boy to the first boy?!
I really doubt about SEBI's intention.
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I will not touch such physically settled low liquid stocks for option writing. I know the actual impact cost for forced square off(in market order) could be huge for such large positions. My experience as an option writer, it is easy to write big volumes OTM options but not easy to square off them. It's easier to let them expire worthless.
Bcoz of SEBI, most of options writers are not going to change their style. But, they will skip such stocks.