Its the same rationale used for Equity trading where they charge 0.1% on both side for delivery based EQ and only 0.025% on sell side for intraday. . . . lol
All I can guess here is that the government is targetting revenue than thinking about the trader/investor.It could only come down when volumes increase like it happened last year 
When you buy any option whether its stock or index, you are buying a certain quantity of stocks by paying some premium. It means you are ready to buy the shares @ that particular market rate with a premium. Buying an option gives the buyer right to buy the shares but not obliged to buy at the expiry or within the expiry.
Where as in Equity transactions shares are settled against the cash & vice versa, here you are obliged to buy the shares. In india all the derivatives contracts are cash settled, not share based settlement. Considering the same i think when you buy an option you bought certain quantity of that stock paying the part amount of the contract value, So at the expiry if you are not exercised the IN THE MONEY contract it is assumed you will take delivery of the shares. As the exchange rule of settlement of equity it is charged delivery based STT of 0.125%.Theoretically an option is exercised means, that the buyer of an option has exercised his right to take/give delivery of the underlying based on if it is calls or puts respectively.
In India all options are cash settled and there is no actual exchange of delivery that takes place once it is exercised, only the cash difference is settled. But since theoretically this accounts to an option buyer asking/giving delivery of the underlying the STT is now considered as per delivery based trade which is 0.125% of the entire value of the trade and not just the premium.
What is a mistake by the government though is that when they reduced the STT rates for delivery based trading from 0.125% to 0.1%, they I guess forgot to reduce the STT for option exercised rates from 0.125% to 0.1% because ideally going by the logic it should have gotten reduced also.
Source: http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Well explained by praveen & Siva.. As all the options contracts are cash settled.. So, the buyer of the option whose contract is in the money means he has exercised his right to take or give delivery of the underlying if he has bought a call option or put option respectively.
So at the expiry, if you are not exercising the in the money options it is assumed you will take or give delivery of the underlying.
Check Warning: 5 Traps To Avoid When Trading Bank Nifty Weekly Options on the Expiry Day... explained well in deep here..
Enoy..
My question was to know the rationale behind penalizing a buyer of the option who lets the option expire ‘in=the-money’.
Btw good food for thought - never thought about this!
Since its known that all derivative contracts are ‘cash settled’, why is it ‘assumed’ that I will take delivery of shares ?
Because, if its share based settlement you’ll have to pay the full amount right? to take delivery. As of now there is no such settlement is happening, So its generally assumed of taking delivery of shares.
In case of a compulsory share based settlement, not all the buyers can pay the full amount of the contract to take delivery, So its penalized the buyer of IN THE MONEY OPTIONS.
Sorry, but I’m kind of confused reading your comments.
This is again what Praveen says, but the point is when the exchange doesn’t do a Eq settlement then why charge STT as per EQ delivery. Moreover options are traded all across the world and exercising is usually cash settled unless they opt for delivery settlement.
Rakesh, India is among the only few countries where exercised stock options are cash settled, in most developed markets exercised stock options usually mean taking/giving delivery of the underlying. Yeah, Index options are mostly cash settled. If you look at the road map set by SEBI (can’t find the link), India would eventually get to a point where there would be actual exchange of underlying if the stock option is exercised, it might take time, but we will eventually be there. Hence STT on exercised options, are charged based on theory, that the buyer of the option takes/gives delivery based on calls/puts in case of him exercising.
