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.