What are the risks associated with the physical delivery of stock Futures & Options (F&O)?

Physical delivery of stock F&O may cause systemic risk in the capital markets and pose a risk to traders.

Ex: If a client holds stock futures or any in-the-money stock option at expiry, they must deliver the entire contract value worth of stocks. Because the risk of the client not having enough cash to take delivery or stock to give delivery increases as we get closer to expiry, the margins required to hold a future or short option position increase. Margins must be at least 45% of the contract value on the last two days before expiry.

Even for long or buy option positions that are in the money, a delivery margin is assigned four days before expiry. Long in the money option margins increase from 10% to 75% of contract value - 75% on the last two days of expiry. The broker squares off the contract if the client does not have enough funds or stocks to give or take delivery. If the customer indicates a desire to hold after the higher margin has been blocked, it indicates a desire to give or take delivery.

The risk comes from out-of-the-money options that suddenly become profitable on the last day of expiry. In the expiry week, no additional margins are blocked for OTM options, and when it suddenly turns in the money, a customer with small amounts of premium and no margin can be assigned to give or take large delivery positions, posing significant risk to the trader and the brokerage firm.