Settlement of index options on Expiry

There are number of old questions and multiple different type of answers on the settlement of index options. I would like to understand few things with respect to not closing the option trade on the day of expiry. The question is specific about nifty or bank nifty index option and not about stock options.

  • What will happen if I short or go long on any option and I am not able to close it on expiry day due to liquidity issues or if there are no buyers or sellers respectively?
  • If I buy an option and it expires OTM without me closing it, what will happen after expiry? Are there any additional taxes or penalty?
  • If I buy an option and it expires ITM without me closing it, what will happen after expiry? Are there any additional taxes or penalty?
  • Is there any additional STT for any of the above case?

I would appreciate if someone can answer these clearly.

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Upon expiry, if your Option expires OTM it will expire worthless, if your Option expires ITM, it will be settled at Intrinsic Value.

It will expire worthless and you will lose the premium paid to purchase the Option, there are no additional charges.

If your Option expires ITM, it will be settled at Intrinsic Value, and for this there will be additional STT charged at 0.125% on Intrinsic Value of the Option.

Eg. You bought 11500 CE and Nifty expired at 12000, your Option will have Intrinsic Value of 500 (12000 - 11500), on this 500 there will be additional STT of 0.125% ie. 46.875 (500 * 0.125 / 100 * 75 (Lot Size)).

If you are Short and your Option expires ITM, there is no additional STT as you have already paid it when you sold the Option.

2 Likes

Thank you very much.

One last question. So If I do not care about paying the extra STT on ITM option, I would be safe to let the option trade get closed on its own right?

You can leave it to expire, exchange will settle it at Intrinsic Value and any profit or loss you are making will be credited to / debited from your account.

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Will liquidity come in the picture? Or it is intrinsic value which will be traded?

Upon expiry, option won’t be trade. It’ll be settled at the intrinsic value.

STT of 0.125%

Does it really make a huge difference ?

Or should i square off the position before 3.30 pm and pay normal regular STT and the brokerage ?
I hope there is no other differences ?
(By the way: what would be the STT if i square off exit before 3.30 pm)

What does your experience and expertise advise us on this ?

What would happen if i request for excercise / donot excercise option etc ?

Or is there any other way around to maximise the profit?

@ShubhS9
@vishnux
@siva
@nithin
@Prayag
@rupeshmandal

Humble request for the kind reply . I indeed appreciate …

To explain with a hypothetical example -

ITM option is exercised at expiry ITM option is squared off before expiry
Trade Details - Bought 100 Lots of Nifty 16,000 CE @ Rs.15 Trade Details - Bought 100 Lots of Nifty 16,000 CE @ Rs.15
Nifty lot size = 75 Nifty lot size = 75
Nifty settlement value at expiry – 16,100 Market Price at which Nifty 16,000 CE Option was squared-off – Rs.100
Instrinic Value of contract – (Settlement Price - Strike Price) * Lot Size * Number of Lots = ( 16100 - 16000 ) * 75 * 100 = Rs.7,50,000 Value of contract – ( Premium * Lot Size * Number of Lots ) = ( 100 * 75 * 100 ) = Rs.7,50,000
STT at 0.125% on instrinic value – 7,50,000 * 0.125% - Rs. 937.5 STT at 0.05% on contract value – 7,50,000 * 0.05% - Rs. 375

With reference to this thread and this thread

Simply put, the STT charges for exercised options are 2.5 times compared to STT charges for options that have been squared off.

2 Likes

Big difference .
So , isn’t is the best to squareoff/exit the ITM bought options before 3.30 pm on expiry ?

Apologies, I had shared the wrong STT charges. In the above example, when one is trading 100 lots, the STT charges for exercised options is 937.5 and the STT charges for squared-off options is Rs. 375.

So . Not much difference with 100 lots too .
So . I think it doesnot matter whether i exit before 3.30 pm or let it expire after 3.30 pm . On the expiry day?

Am i right?

@Prayag

As u said that if i don’t let the ITM buy option ; squareoff/exit before 3.30 pm ; the only cons is : i have to bear the STT 2.5 times the normal STT .

which i think hardly makes any difference !
What you think on this ?

BUT , let say suppose e.g. : i have taken a hedge position , wherein i have got margin leverage exposure benefit due to the hedgeing .

In this scenario , if i exit/squareoff the above long ITM position before 3.30 pm or at 3.29pm ; to save myself from not paying the 2.5 times of the normal STT ;;; will it result in any peak margin penaty or eod penalty ; because although it is the expiryday , i break the hedge at 3.29 pm whereby the margin require would increase !!!
???

@siva