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.