NO MORE STT trap on exercised In the money options

General
44

yep, you are right. But always best to sell it in the market, there will be some intrinsic value before market close.

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45

Very true. Thank you for the clarification.

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46

Nithin, So you will do it ONLY when the STT is more than the option intrinsic.

Say near expiry, if I am 100 bucks in the money on the 10000 put (but still within CTM range), and the STT (only 13) is NOT more than the intrinsic value at the time then you will not apply the “do not exercise” to that position, right ? So, if I still want to save STT on that one, I must settle it myself ?

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47

Yes, you are right.

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48

The logic of 3 strikes below settlement price of Call options and above settlement price of Put options, as per the NSE circular. If the closing is 10010 and my strikes were 9900CE and above and 10150PE and below, only then I am eligible for “do not exercise” right? In both cases the buyer is ITM by huge amounts. However in case of the puts the points gained are140 (for calls it is 110 in this example) . Max STT for exercising will be ((10010+140) x 0.00125) = Rs 12.68 (for 1 lot and Rs 1.27 lakhs for a 10000 lot). [As an aside - If not exercised and just squared off the STT on option gain is (150 x 0.0005) = Rs 0.075 i.e 7.5 paisa )]
In extreme case for Nifty at 10001, this 3 strikes above will be valid for a 10150 PUT.
The 3 strikes works for NIFTY (as they are 50 points apart). what about other options where the 3 strikes are different? Is NSE ensuring that strikes will be modified to fit their model for each stock?

As it is more a accounting issue due to taxation. What was the need for “do not exercise”? People will lose a lot of money if they do not understand the 3 strike (I hope I have understood it, I may not, so my question is geared more towards understanding)

Who will keep the money when a 10150PE person does not exercise? by not understanding this?
Can I know if I am going to be a beneficiary of someone not exercising, if I am a seller at 10150PE when that bechara checks “do not exercise”.

I feel this will give rise to more problems. It is like trying to save the 10000CE buyer at a 10013 close, and creating more problem for those guys who are ITM (like 9950CE and 9000CE buyers) and wondering about STT. What is this 3 strikes? Have I understood it wrong?

Wouldn’t it have been better to just say Exchanges will exercise it only when “Intrinsic value” greater than STT, unless squared off before expiry. NSE is mixing up legality with taxation, and more end customers are going to lose money. What was the need for “do not exercise” ?

What is zerodha’s position on “do not exercise”? Because exchanges are mandating it.

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49
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50

Exchange is not mandating it. Broker has an option to send request to exchange to lapse options within these strike prices. So we are only sending request to lapse options where STT is more than the intrinsic value. I think this was the best possible solution exchange could have come up with. For everything else, there would be a need to go to finance ministry, which could have taken a much longer time to fix.

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51

I agree. What I should have said is “Exchanges are mandating that Brokers honor “do not exercise” option if client chooses to use it” I am happy that Zerodha is doing that regardless, and saving its clients the heartache in situations where they are CTM and are not able to square off for any reason before expiry.

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53

As per circulars from NSE & BSE - All ITM option contracts which does not in the ‘CTM’ option series, shall be exercised automatically as per existing practice.The CTM strikes range shall be arrived as under:

  1. For Call Options - 3 ITM options strikes immediately below the final settlement price shall be considered as ‘CTM’
  2. For Put Options - 3 ITM options strikes immediately above the final settlement price shall be considered as ‘CTM’.

So effectively,the brokers ideally should flag all those clients for “Do Not Exercise” facility which are fit in this criteria (for the 3 immediate ITM strikes of the respective Call & Put options). Why they only select clients where STT > ITM Value?

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54

Any Update on above query?

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55

@kanhaiya_shaha
Why they only select clients where STT > ITM Value?

if STT value is higher than ITM value , when exercising the option client need to pay more STT than what he/she gets back by exercising the option. So it is obviously better not to exercise.

For ex :-
Assume you have bank nifty 25000 CE and bank nifty expires at 25008 .
Here by exercising the 25000 call option you will get 8 points , but you need to pay approximately 20pts as STT.
So it is better not to exercise.

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56

So, as per circular; three immediate Call option Strikes i.e 25000, 24900 & 24800 (Being CTM Options) should be flagged for “Do Not Exercise” facility, isn’t it? (Effectively those Strike should NOT be attracted for the STT). Call holder of 24900 & 24800 strikes should get the full difference i.e. 25008(-)24900=108 and 25008-24800=208, isn’t it?

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57

What is the reference of 3 immediate Close To Money (CTM) mentioned in the circular related to “Do Not Exercise” Options?

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58

Any luck on this?

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59

But 25000 will be CTM and will not be exercised. So does trader get 8pts?

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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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