Why would someone sell option at very low prices such as. 5 paisa and so on?

Is this to avoid excess STT.

If an option is at 5 paisa, so it must be out of the money, so a buyer of an option has no STT risk.

Typically this is people who have shorted this option trying to exit rather than fresh buyers coming in. If you see when this happens, the open interest would typically be dropping/staying same but never going up.

When you short options a margin is blocked, and the only way to release it is by exiting it. So assume you shorted 100 calls of stock X trading at 101 for Rs 3. Margin blocked is 50k. The stock price drops to 85 in 5 days. Assume we are 1 day to expiry and you want to use this margin blocked to trade something else. You don’t want to wait till contracts are expired. The only way is by offering to buy back at some value. Since no one would sell for 0, you offer to buy this back at 0.05.

There might be players who are sitting on large amounts of capital (typically prop traders) who would be okay to pocket this almost guaranteed return by selling at 0.05. It i s very low yield, but if people are sitting on large unutilized capital, they might be okay with it.

@ksksat @nithin @maddy_Des So apart from very very low yield and margin block for some time …is there any thing negative in selling at 0.05? on expiry day? or day before expiry day when you are sure underlying will not reach to that strike (i.e. will remain out of money)
am I missing something?

That is the risk one has to take, there may be one day where it can turn ITM and can result in heavy losses, if one is comfortable with that then they can, one should able to understand the underlying risk to reward ratio and initiate trades.