New trading opportunities with STT on exercised options changing from this expiry?

As per the circulars shared here, brokers will lapse all in the money options where STT is more than the intrinsic value of the options so clients don’t lose out. What this would mean though is that option writers will get to pocket this lapsed premium. Am I missing anything, or is this a new trading opportunity?

Example, if Nifty closes at 9896, 9900 puts will have an intrinsic value of 4 points. But STT on this will be 10 points. So brokers will lapse all 9900 puts and expire it at 0. So if tomorrow at 3.29 pm just before market close, we know that Nifty will expire and settle at 9896, writing this option at 4 points will mean guaranteed profits of 4 points profit? If that is the case, will this opportunity even exist, I guess all arbitrageurs will jump on it?
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I believe, there is nothing called as guarantee in markets. First of all we need to see what is the bid and ask at 3.29, i doubt that it will be 4 points.

And when broker lapses 9900 puts in your case, the options will be assigned to writers randomly by exchange, and there is no control / part played by broker here.

Hope you get lucky all the time :slight_smile:

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This definitely seems to be a new trading opportunity for option writers. The only tricky question is that will all brokers take the effort of calculating which strikes have STT more than intrinsic value of the option and lapse them. Because when you write, you’d not know the buyer of the option, so it could very well happen that the brokerage firm that this buyer is trading with somehow misses this opportunity to help the client. But I am hoping that all brokers will be sensible enough to lapse all such options and save money for the client.

I had done this exercise a few months back when Nifty had closed an expiry just in the money by couple of points on seeing the total open interest at closing of the strike price where STT was much higher than the intrinsic value of the option. I then calculated the STT based on the exercise price and subtracted the intrinsic value from it. The number I had got was close to Rs 30 crores on that. Assuming intrinsic value of this is around 25%, that would mean Rs 7.5 crores of premium that will be lapsed. Considering out of 12 expiry on Nifty maybe around 3 will have Nifty closing at around the strike price, that is potentially Rs 25 crores that opens up as an additional trading opportunity. If we add all Banknifty and stock option contracts, I am guessing there is atleast Rs 75 to Rs 100 crores of additional pop that will be left on the table for people writing options on these strikes.

But markets are extremely efficient, all of this will somehow get corrected very soon and no easy money will be left on the table. :slight_smile:

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As per my view on market especially on expiry day, strikes which are close to SPOT are highly volatile during last half an hour trading session.

Since we are not sure on mechanism which brokers manage to prevent STT, my guess is even option buyers may go on caution and either take advantage of volatile movement during last half an hour by either closing out their position to reasonable profit or to reduce the risk of completely loosing out premium. If this becomes practice then opportunity for option writer will be diminish.

Trading opportunities will exist on both sides, but my guess is that more new option buyers will come because we have more lottery players than option writers in the markets. The buyer will just take a bet and hope they make a killing without having to worry about STT. To know what will really happen, we’ll just have to wait and watch.

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The new norms may shift trading strategy of both option buyer and option writer. But it will protect to those novice traders who are not aware of STT trap on auto exercised In the money options and also to brokers where client account will go debit because of high STT.

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Definitely an Opportunity to options writers to make more profit, but initially it may take little time to adopt the process of ‘Do not exercise’ option.
Risk array for option writers also in case if you shorted options at rs 2 & it closed intrinsic value of rs 8. In these case counterparty fails to give request not to exercise then the option writer has to bear the loss of 6 points, so ideally no risk free money in market.

So first expiry, Banknifty closed at 24318. 24300 call was quite an active contract yesterday. Around the closing, this was trading at 13 points.

As a broker, yesterday was the first time we got the option to lapse such contracts because STT is 30 points, option is in the money by only 18 points. So 12 points extra STT if we don’t lapse. It was an extremely easy process.

If all brokers ensure that such options are lapsed, this is a no-brainer. 13 points premium could very easily have been pocketed by all writers.

But what is the mechanism on the basis of which these lapsed contracts will be assigned to writers ?

Is there any way to calculate closing price before 3.30

Currently it is a lottery. If you have written, you might or might not get assigned with these lapsed contracts.

Yeah weighted average of the last 30 mins, but to get the exact you would need the tick by tick data feeds. What you could also do is look at the futures price, they would usually mirror the closing of the underlying in the last few minutes of the expiry.

So writers are also taking some risks here.

I said in this thread that option writers will get more money. But I did not have any idea these many crores on the table. :slight_smile:

Of-course the premium pricing will get corrected soon enough. But I am not sure about the less liquid instruments like individual stocks.

Whatever be the case, the option writers got to benefit here. Their risk is reduced now. They have the profit point of settlement price extended to the break-even range of STT.

ALSO, For instruments having strike price intervals overlapping or real close to the STT breakeven, there is more money for them there.

I kind of expect SEBI will make changes to the rules so these anomalies will be removed. But the cynicist in me tells that SEBI will delay till the market becomes efficient with the new process and then they will change the rules leaving another anomoly for some time. The dilemma here is what to call the people benefit on this ping pong between exchanges and SEBI, crooks or the intelligent. (There has already been a ping-pong with derivative contract size).

I believe SEBI will step in because of the new exchanges and the need to align with international practices/markets.

For testing purpose yesterday i shorted 2lots of banknifty 24900CE at 5.5. spot closed at 24912.25

Today as per contract notes only one lot bought back or settled at 12.25 . There is only sell entry for another lot. @nithin as you said the brokers automatically choose not to exercise , but here one lot is settled at 12.25

and buy entry for another one lot not shown in contract notes. can you pls clarify this

*I said, Ideally brokers who have clients with such long options should let it lapse. Whoever the client who was in buy position for that 1 lot would have lost 18 points extra as STT. Yeah, so what is shocking is that all brokers aren’t yet lapsing these options. They either don’t know, or don’t care if their client has enough funds to make up for the 18 point extra loss.

Pls explain the below scenarios

  1. I sold to X who is bought it back for covering his short position.

  2. I sold to X. X sold to Y. Y bought it to cover his short positions.

In the above situations how you can able to find exactly the contract i sold

No one other than exchange can tell this. It shouldn’t matter to you as well. All that matters is that you are short on the contract. The buyside could have gotten shifted 100 times. At the exercise, the broker of the other client if he doesn’t lapse, then this strategy u r trying will not make money

Is there any tool to calculate the STT for an In the money option that I didn’t square off?

I have three lots of BankNifty 26400 call. The BankNifty today has closed at 26503. The LTP of the option is 70 odd. So I didn’t sq. off and allowed it for settlement. How much will be charged as STT on these three contracts?

Regards
Sam

STT is approximately 33.15 points…
BN closed at 26503 … you might get 70 points approximately per lot