My question is suppose the BANKNIFTY index is at 18860 at 3:20 pm(IST) and what i am seeing is that the put option 18900 is trading at 15-16. but technically it should be 40. So my question is suppose if i would have 18900 at 5/- and if i didn’t sell it out, do the sell in market after market close would be executed at 40? or it will be executed as the orders are in order book?
Upon expiry, the contracts are always settled with the spot price. So, if you’re holding 18900 Put option, and if the settlement price of Bank Nifty (After the averaging) is 18860, then yes, you’ll get a credit of Rs.40 to your account. It won’t relect as an order/trade since it’s not in the nature of an order/trade, instead it’ll get credited to your trading account. You’ll be able to verify this by checking the credit to your trading ledger.
The downside to letting in-the-money options expire is the higher rate of STT that one has to pay. It has been explained in detail here: http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
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Hi,
Option price = Intrinsic value + Time Value
At the time of expiry, the Time Value will become 0 and what will be left is only the intrinsic value.
Regardless of what price the option is trading at, if the option is In-The-Money(ITM) then it will be settled at the Intrinsic Value price.
In this case, if you have Banknifty 18900 PE and Banknifty closes at 18860, then your option will be exercised at 40.
Note ; Options are considered exercised if you hold buy positions in options till the end of expiry (till after 3.30pm on last thursday of the month) and with them having some intrinsic value or being ITM (in the money).
One must square off their options before expiry to avoid the STT trap on option selling.
STT on option trades done on the exchange is charged at 0.05% of the selling side of the premium value.
STT on Buy option positions that get exercised is 0.125% of the entire contract value.
STT Calculation:
Assuming you are holding 1 lot(40 qty) of Banknifty 18900 PE and you are,
1. Squaring off before 3.30pm:
Assuming that the option price is at a discount to its intrinsic value and is trading at Rs.20.
STT = 0.05% * ( 20 * 40 ) = Rs.0.40
2. Allowing option to exercise:
Option exercise price is Rs.40, if Banknifty closes at 18860. Here, even the strike price is added to the option premium while calculation STT, so
STT = 0.125% * ( ( 40 + 18900) * 40 ) = Rs.947
Profit for 1 lot:
1. Squaring off before 3.30pm:
Profit = Quantity * Option Premium = 40 * 20 = Rs.800
2. Allowing option to exercise:
Profit = ( Quantity * Option Price) - STT = (40 * 40) - Rs.947 = Rs.653.
As observed, even though your option will be exercised at Intrinsic Value, one must square off the option to maintain a higher profit and avoid a higher STT.
If the option was just about ITM with a premium value of 24 or lesser ( in this case ), then you will incur a loss rather than making a profit if you allow the option to exercise.
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Hello Bharat W,
Your explanation is correct except for 1 thing. He had PE whereas you have written as CE 
Thanks
Thanks for the correction.
So, which closing price is taken into account to calculate settlement amount? Is it the weighted average of the last 30 minutes or the close of the last 1 minute candle?
It is always last 30 mins weighted avg price.
How are ITM CE settlements done in the case of weekly Bank Nifty options? Can this be please indicated?
The same as monthly options, settlement happen based on banknifty spot closing price for that day.
Thank you
Hi, can you deploy a calculator for this? There are so many people who have this query in every expiry and there seems to be no calculator available to calculate and estimate the profit after STT etc. I think that will make it simple for the trader. Thank you!
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Just checked NSE. This is what is mentioned.
Options Contracts on Index and Individual Securities Final Exercise Settlement Closing price of such underlying security (or index) on the last trading day of the options contract.
https://www.nseindia.com/products/content/derivatives/equities/settlement_price.htm
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Closing price of underlying is arrived by last 30 min weighted avg price.
If you calculate simple 1 closing average of underlying (without weightage, which is a tedious process, since we wont have all ticks etc…) it will be much closer to actual weighted average closing. (may be a +/- 0,02% ).
I am not sure if I understand teh last part about the weighted average, for instance nifty today closed at 11275, will the calculation for today’s weekly nifty expiry for 11200 CE , use that as the price or will it be something else
?
Yes, 11275 is used for calculation. So intrinsic value at expiry for 11275 CE would be 75
so then what is this “weighted average” concept??
Average price of last 30 mins i.e. 3-3.30 pm is considered as closing price for the the day. This is also called weighted average price.
thanx, is that price got from weighted average used anywhere??
@sohnythomas It’s the final closing price for the day. Like today it’s 11257. So 11275 is the last traded price for the day whereas 11257 is the weighted average price as well as closing price for the day