Latest update 21st Aug 2019 - Starting Sep 1st, STT on exercised options would be on the intrinsic value , so truly no more STT trap.
The discussion on the below thread becomes redundant after this update.
An amazing news for all option traders out there. Finally, exchanges have found a fix for the STT anomaly on exercised options. Here is link to the BSE circular with the announcement, and this for the NSE circular.
So on the expiry day, there will be an option to not exercise certain strikes of options (those which are expiring just ITM and where STT is more than the intrinsic value of the option).
For all those who want to learn more on how STT on exercised options were a trap, click here. Looks like this petition which all of us supported helped.
It will lapse. So for example if you have 10000 calls of Nifty and Nifty expires at 10001, you can decide to not exercise since there would be a 11 points STT to it. So assume you had 10 lots of this 10000 calls, earlier you would have had to pay 10 points (11 as STT -1 as intrinsic) or almost Rs 7500 as STT. Now you can just decide to not exercise and avoid paying this additional STT
Ok so in the example you mentioned I won’t profit because the contract has lapsed. The only benefit we have under this innovative mechanism is that we can choose when to exercise and when not to based on the STT breakeven levels.
For those writing options their profit point is now widened. They can pocket premium on more contracts.
When writing Nifty 9800 calls, the strike is practically about 9812.5. vice versa for puts. So there is about 25 points range for Nifty which is for practical reasons equal to 9800 strike. So when one writes both puts and calls, the underlying need not close exactly at the strike for most profit. It can close anywhere in the range.
The payoff diagram of short straddle will not have the sharp top edge. It will be a range created by STT break even. Little more like short gut or short strangle,