NO MORE STT trap on exercised In the money options

General
60

The idea of 3 CTM contracts are those contracts where the STT on notional value is more than the intrinsic value of option.

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61

Yes the person who is short gets that additional 8 points as profit it this contract is lapsed at 0. Option buyer doesn’t get any

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62

Hi Nithin,

  • Curious to know, why Exchanges mentioned 3 CTM strikes? (As per my knowledge; only Closest ITM strike is the only strike where STT could be more than the intrinsic value, isn’t it?)
  • So; the Point mentioned in the circular in the context of the 3 CTM Strikes looking vague.
  • After reading the circular; it gives the impression that; the holders (buyers) of the 3 immediate CTM strikes can choose ‘Do not exercise options’ facility & effectively they would not be levied for the higher STT @ 0.125% on Settlement value. Since the expiring contract is not going to be exercised & buyer has absolute right to get the intrinsic value [i.e difference between closing price of the underlying asset & Strike price.]

Thanks,

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63

Hi Nithin,

As you mentioned in your reply “Now you can just decide to not exercise and avoid paying this additional STT”.
So as I understand previously by default it if option contract expired it was supposed to be exercised. Can you please share some screen shot what is to be done for selecting ‘not to exercise’ or if the option trader does not do anything and let it expire by default it will be supposed to be ‘not exercised’ .

thanks

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64

@nithin, so it means that the writer of the contract (because it was let to lapse because the STT was greater than the in-the-money gain) gets to keep the premium he received even though the contract became ITM at expiry. But is there a guarantee of this, because somewhere in Q&A I read that some brokers are not aware of the option to not exercise and they exercise even though their customer has to pay a higher STT than the gains of being in the money. Is my understanding correct?

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65

@nithin I tried to find my answer however thread is too long, to avoid confusing myself, I though to write a reply.

As an option writer, I have already paid STT while writing option, I would like to understand consequence (if any) in case my option goes in the money and does not become zero (since there is intrinsic value). My first attempt will be to square off however just in case I don’t find a seller later to help me square off my position.

66

@nithin Trying to understand this STT trap issue with an example. Let’s say Ashok Leyland share price is 165 as on day of expiry. What happens if I have call option with 155 strike price. Do I need to square off my position or can I let it get exercised? Which would be more profitable? Wht would be STT implications in both cases?

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I’m breaking up your question into 2 scenarios; implications of exercising and implications of squaring off:

If you square off

Assume you sell the option at Rs.9, your realised credit is 9(x)7000 = 63,000 (Lot size of Ashok Leyland = 7000)

STT you pay on the square off trade = 9(x)7000(x)0.05% = Rs.32

If you exercise

If you hold a 155 Strike call and the settlement price is 165, then your option expires in the money and on settlement, you’ll receive a credit of Rs.70,000 [(165-155)x7000].

The STT you would pay would be 165(x)7000(x)0.125% = 1444.

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69

Thanks Venu

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70

PLEASE HELP ME.

“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).”

Where do I specify it. Yesterday I bought BankNifty 31500PE at Rs 26 yesterday and it closed at 31472. I let it expire and am really worried about paying 2300 odd as taxes :frowning:

71

Please help - How do I specifty “NOT TO EXERCISE” and avoid this STT trap

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We will take care, client need not worry about this, if STT is higher than premium then we don’t exercise it.

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73

Thank you. Great

74

Has the proposal to charge STT based on price difference instead of entire contract value has been implemented?

Source: https://www.moneycontrol.com/news/business/markets/budget-2019-stt-securities-transaction-tax-4154981.html

75

Not yet. Supposed to be implemented from 1st september.

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76

Sorry for confusion. What you won’t exercise? You will squareoff the position before the expiry or let it expire as ATM?

77

We don’t give it to exercise, let it expire worthless.

78

But how ITM would be worthless? It will expire with some intrinsic value.
Isn’t it?

79

Theoretically yes, but exchange started giving broker option to do so only in case if premium won’t cover for STT.

80

Thanks @siva :slight_smile: