Option expiry for nifty december 2018 series ? can anyone help to understand STT trap?

#1

Today nifty closed at 10779.80 . The put option 10800 PE December 2018 series is valued at 15 Rs . Now STT if this option expired on buyer side is more than 13 rs per lot . Hence buyers wouldn’t exercise this position as at 15 rs premium they will be in loss despite a profit of 5rs they will actually incur loss of 7 rs per lot because of STT . Now i wanted to know that if i sold this option at the last at RS 15 and nifty stays at above closing level then
Please let me know which of the bellow stated scenarios will occur

  1. will i incur profit of 15 rs as buyers would be losing on STT hence wouldn’t exercise their positions
  2. I will incur loss of 5rs since the buyer will certainly exercise his position
  3. Can’t say anything definitely . Any of the above two scenarios can occur
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#2

As per my understanding.

1) Buying CE and PE -

  • If the buy price is less than the sell price (option sold before expiry) then trader will get the profit as difference between bought and sold MINUS 0.05% STT on premium.

  • If the buy price is less than the last traded price but option has exercised (trader has not sold the position before expiry) then trader will get the profit (only for ITM) as difference between bought and last traded price MINUS 0.125% STT on the entire contract value.

  • If the buy price is greater than the last traded price but option has exercised (trader has not sold the position before expiry) then trader will have to carry the loss of entire premium. STT is not applicable here as premium value is zero.

  • If the buy price is greater than the sell price (contract sold before expiry) then trader will have to carry the loss as difference between bought and sold price MINUS 0.05% STT on premium.

2) Selling CE and PE -

  • Exactly opposite of the above points. But STT is not applicable as it is already paid on premium amount (0.05%) while initiating the trade.
#3

@ksksat
Please let us know whether the above understanding correct?

#4

@AtD your reply is general case definitions.

He is asking a tricky case.

@incognito for ur eg basically we write a put option betting that nifty will not go below 10800.
But nifty closed at 10779.80. That means a loss of 20.2X75 = Rs 1515 ( approx). In this loss adjust ur already collected premium Rs 15. Loss will be 1500.

Now after writing ur option if u purposefully squared off by buying same put option 1 lot for whatever reduced premium available only in that case profit is confirmed

Otherwise it will be considered that option exercised and exchange will recover the exercised loss from you because you were a option writer and your bet that nifty will not go down below 10800 failed.

Now this 1 lot with which counter party u wrote is not transparent. Also u don’t know if that guy exercised or not.

Watever , at end of expiry if u are holding a written option, as a writer ur loss is confirmed as option went below 10800. So if u squared off before expiry then that much profit us urs. Of course u must be able to square off by finding another party.

#5

@ksksat Thanks for the reply.

On the same note-

If I write a PUT option of 10800 and Nifty closes just above (say 10800.80) on expiry day and option is exrecised then Do I get the entire premium as a profit same as in normal condition?

If I **write a CALL option of 10800 and Nifty closes just below (say 10779.80) on expiry day and the option is exrecised then Do I get the entire premium as a profit same as in normal condition?

#6
  1. Assume the buy premium was 20 and last traded premium was 5. Here can I expect the profit of entire 20?

  2. Assume the buy premium was 20 and last traded premium was 25. Here, what will be the profit, 20 or 25 or loss of 5?

  1. Assume the buy premium was 20 and last traded premium was 5. Here can I expect the profit of entire 20?

  2. Assume the buy premium was 20 and last traded premium was 25. Here, what will be the profit, 20 or 25 or loss of 5?

#7

@atd if u had written call option of 10800 and nifty closes at 10779 u have Won ur bet ( bet is nifty will not go above 10800). In this case whatever premium u collected when u wrote the option u can keep it . u need not square off ur position. As a writer u have won this bet and option expired worthless ( which is loss for buyer of the call option)

So don’t worry about wat premium it is currently running at. The option expired and u can now retain the originally collected premium. The blocked margin in ur trading account will also be released by the broker.

Now let us take another case where u may want to square off. Let us say jan1 2019 nifty is at 10910. Now u write a call option at strike price of 11000 1 lot for Jan 31 expiry… The premium for this is now say 100 rupees. So u will collect Rs 7500. X amount will be blocked in ur trading account.

Now 3 days passed, nifty suddenly came down to 10500. Now the same call option for 11000 strike is trading at just 40 rupees . means 40x75= Rs 3000. Now u login to ur account and see that now u r running a profit of 4500 ( sold at 7500 but same call option is now 3000 so profit is 7500 - 3000 = 4500)

Now u think. Today it is 10500 but wat if it rises next week and wat if by expiry date it becomes 120000. U don’t know but u decide to exit now with this 4500 profit. So now only u will square off by buying same 1 lot same call option at strike 11000 . by taking exact opposite position u are now exiting safely and u have made 4500 profit. Ur X blocked amount will be released by broker now itself and u are entirely out of this game.

But another brave option writer could have waited and if by Jan 31st nifty closes as 10900 also he can retain his entire 7500 as profit. X amount will be released only on jan 31 evening for him.

#8

@ksksat Thanks, well explained.

1 Like
#9

Is this also true with respect to ITM option contracts?

Assume, current NIFTY is at 10900. I write 10500 Call option at the premium of 100 and 11500 Put option at the premium of 150.
On the day of expiry, NIFTY closed at 11200. Last traded price of 10500 Call is 150 and 11500 Put is 200. Both are exercised automatically.

So can I expect the credit of 250 (100 Call + 150 Put) in the account?

@ksksat Please help to understand above.

#10

@atd let us take case by case. Both these cases u r a option writer and u r letting the option position exercised/expired without square off

First put writer case. 11500 put wrote and nifty closed at 11200. That means u lost the bet. U incur a loss of (11500-11200)X75=Rs 22,500 per lot. Adjust ur already collected premium 150

So ur net loss is Rs 22350. As a writer during expiry u need not pay any STT.

Always remember if option is let exercised or expired as a writer ur loss is pre determined irrespective of current premium rate because u r not squaring off

#11

@AtD next case u are writing 10500 call option. Nifty closed at 10500. So this bet is a tie match.
Now u need not settle any loss. U can keep ur original premium of Rs 100. No STT at the time of expiry

#12

@ksksat Thanks.

Can you please explain when and why to sell ITM over OTM?
Or if possible share the link for reference.

#13

Pls clarify u mean as a option writer?

#14

Yes. As an option writer when it is more beneficial to write ITM over OTM and why?

#15

Let us take call option for eg. Nifty rallied many points suddenly and reached at 11000 and call option strike price 10900 is hence now ITM Correct? Now today is Jan 3rd. U as a option writer u look at the sudden rally of nifty to 11000 and u feel that this level is not sustainable. U also feel nifty will fall well below 10900 levels. U r very sure there is a correction waiting before Jan 31st. So when every body open interest lying in above 11000 levels u feel u can bet that nifty will not go above 10900 before expiry. Remember this is In the money ITM strike as of today. But still u go ahead and write the option. U collected say Rs 1900 as premium.

Later 2 days over and nifty fell to 10800 levels because of some event and weaker support levels. Now the same strike 10900 call option has become OTM and its premium rates are now reduced to Rs 1400. Now u still feel nifty will further go below 10800 and it will never reach 10900. So u keep quiet and wait. By Jan 31st nifty closed at 10850. Ur written call option of stike 10900 expired worthless. U now retain ur entire 10900 premium.

So when u see a abnormal rise with weaker support levels and u feel many sectors are having cracks and if u feel the hyped levels cabbit sustain until month end u write a call option at a ITM strike Price.

Same way if u feel market over reacted and came down by say 500 points and u r very sure it cannot go down below a certain ITM strike level u go and bravely write a put option at that ITM level.

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#16

Very well explained. Thanks.

#17

Is this true for OTM as well as for ITM? If yes, then why everyone says that loss can be unlimited for Option Writer?

#18

@atd hi sir sorry i meant the loss is always a calculated value. Upon expiry if the spot value closed as OTM the writer can retain entire premium and no loss. Upon expiry if spot value closed as ITM ( above the strike price in case of call option for example) then the writer loss is s fixed calculated value( current spot minus strike price) X lots and then adjust the already collected premium to arrive at net loss

#19

Why they call the loss of a writer as undetermined is because u never know where the spot will close on expiry day.

For buyer of option if spot does not close as per his all target then simply he loses onlybl the premium value

#20

@ksksat Thanks.
:+1::+1: