What is STT trap

General
1

Could anyone please explain to me what is “STT Trap” in layman language. How to avoid it?

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Hey @Shivam_Gupta

Try this

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Also, the compulsory exercise is now gone. So worst that can happen to you is that if you have an option whose intrinsic value is less than STT (.125% of underlying) on expiry, you can choose not to exercise it. So in that case you make no money.

It was bad in old days, when you could make 2 points as intrinsic value and pay 13 as STT because of compulsory exercise

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And this:

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Thanks… :slight_smile:
What I understood; STT trap is basically for option buyers when the option expires ITM. To avoid STT trap option buyers are suggested to close their position before expiry. (Though they will lose a part of their premium). But my question is; how will I (assuming I have an option which is ITM) find a buyer because there will be no buyer on expiry?
Option sellers are out of this, doesn’t matter whether option expires ITM, ATM or OTM. Am I right?

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@Shivam_Gupta
In the last part of the webinar and the post, the buyer trapped with ITM has to potentially pay 900 plus rupees as STT in most options. If she exercises, she will end up paying STT in most cases. The better outcome is to square it off with someone at a slightly more than STT affected price, which is slightly less than theoretical price.

Any one who had sold options with net short position will buy this ITM option from you, squaring off their short positions. They do not have to pay STT because they only become 0 from net short at expiry. Any such person will happily take up this deal because they get a better price to square off on their losing ITM short positions.

So if you are a seller originally, and the option went ITM, and now you are looking to buy back and square off, you will always find someone, who has an ITM option he originally bought. He will give you a better deal to avoid STT.

If you are a buyer trapped with ITM, you will always find someone who has a net short, who wants to square off with you and exploit this.

Hope that clarifies.

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let’s assume I sold 100 shares of Nifty 10,000 @premium 1 rs and it goes to 10,051 on expiry.
so to close my position I’ve to buy it by paying 51 rs to someone on another side (Through exchange).
But in this person on another side has to pay (100511000.125%) = 1256 as TAX on the profit 5100.
so he will get only 3844 (5100-1256)
So we will do dutch to settle this @ 6.28 premium {(1256/2)/100}. ie I’ll buy back Nifty 10,000 @ premium 43.72 (50-6.28) and that person will get 4372 (100*43.72) instead of 3844.
Both will have an advantage of 628 rs :slight_smile:
Am I right?

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Absolutely!

No one wants to give taxes :slight_smile:

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Thanks :slight_smile:

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Hi Shivam…
What happens for Option Sellers at the time of expiry in the following example?
Say I Sell one CALL Option 9000ce (ITM) @ premium around 430 &
I sell one PUT Option 8500ce (OTM) @ premium around 120.
Current Market : Nifty @ 9100
On the expiry date the Nifty will be @ 9200.
Would appreciate if you can elaborate on what charges i will be incurring if I dont exercise the Options at expiry being on Seller side?
Thanks
Shabarish

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STT is charged only on the sell-side in case of options. On expiry, STT is charged on the intrinsic value when you exercise the option on expiry. Exercising a contract can happen only when you had purchased the option, not when you had shorted it. When you short an option and it ends up ITM on expiry, the obligation can get assigned to you. There is no STT when an option is assigned. Therefore, in the examples you’ve given, there will be no STT charged as you would have already paid the STT when you took the position.

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HI @shabarish,
STT trap has been obsolete, it is no more in practice. But instead of the STT trap, you will be forced to buy or sell (depends on your position) the stocks, equal to the lot size.

** This is not applicable for indexes (Nifty/Bank Nifty)

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So In my case On the expiry date in the example mentioned if i had shorted the nifty one lot then i will have to buy the lot (excluding stt) if it is in the money. When I say buying it means the Cash differences. Am I correct?

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Yes !

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Thanks Shivam

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Scenario
Call option buy IndusIndbk 440CE at premium 25 rs 1lot(400)
On the day of expiry spot price is 470 and ends with premium of value 28rs.
What happens if I failed to square off in this situation

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you have to take delivery of 1 lot by paying 440*400=176000 Rs + delivery charges levied by exchanges + other charges.
Generally broker’s RMS (risk management system) takes care of it and square off the position before market closes, but it is better to square off the position by your self.