Starting Sep 1st, finally no more STT trap on exercised options :)

#1

So finally, after years of voicing this issue on every possible forum, there is no more STT trap on exercised options (announced this budget). Here is the circular from NSE

STT on exercised contracts from Sep 1st, 2019 will be charged at the rate of 0.125% of intrinsic value (how much in-the-money the option is) and not on the total contract value like earlier. Intrinsic value for OTM (out of the money) options is always zero, so there’s no STT.

So if you hold 1 lot of 11000 calls and if market expires at 11050. You will pay STT of 0.125% of (11050-11000= 50) x 75 or around Rs 5. Earlier you would have paid around Rs 1000 (11050 x 75 x 0.125%).

What this means for option buyers is that you can let the options expire in the money without having to worry about the much higher STT, especially in cash-settled contracts like Nifty, Banknifty, etc.

This would also mean that option premiums won’t trade at a discount to the intrinsic value on the expiry day, trying to factor in the additional STT. Markets are a zero-sum game, so what is good for the buyers, isn’t necessarily good for the writers. Going forward, if writers are covering positions on expiry day, they wouldn’t get the benefit of the discount in premium.

Happy trading,

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NO MORE STT trap on exercised In the money options
STT Change from today?
NO MORE STT trap on exercised In the money options
#2

So it is not good for option writers but won’t it result in increase of overall premiums specially in expiry day.

#3

:slight_smile:

#4

I mean, it is not like it is bad for option writers. Just that the loophole that existed that option writers were benefiting from is plugged. This is how it should have been from the start in any case.

On cash settled contracts, there ideally should be no discount to the premium on expiry day. So yeah, there will be an increase in premium on most cash settled contracts on expiry day.

About physically settled contracts, the discounts may continue as people will avoid to take or give delivery of the underlying.

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#5

@nithin

Just to understand in layman terms

Does this mean that if we buy options and don’t sell or square off, then we will not be hit with huge STT?

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#6

Right.

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#7

Then what about intraday traders?

#9

No issue from our end, specific to you, as replied earlier you can create ticket.

#10

Is it safe to let nifty/banknifty expire from today?

#11

Can you please elaborate on the paragraph with an example.

#12

You don’t have to worry about paying an excess STT if an options expires in the money. So yeah, safe in that way.

#13

Assume Nifty is at 10920 at 3pm on expiry day. Nifty 10900 calls ideally should be trading atleast at 20 points. But because of the higher STT for ITM on exercise, these calls would trade at a discount. Maybe at 15 points instead of 20, because almost 10 points would be the STT cost if you let the options exercise.

But this was earlier, going forward from today, you shouldn’t ideally see the discount.

This discount mean that option writers could cover their positions at a slightly better than the theoretical price. Going forward this wouldn’t exist.

You should learn all about options on Varsity

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#14

@nithin

0.125% for exercised options but 0.05% for squaring off?

You may want to update the https://zerodha.com/charges#tab-equities page.

Thanks,