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.