“Do Not Exercise” Option’s

“Do Not Exercise” Option’s

Dear Trader, If you are active in the F&O segment of the stock market you must be knowing that you have to pay higher STT on options that are In The Money (ITM) on expiry.  A call option is said to be In The Money when its strike price is below the market price of the underlying asset. The reverse is true for a put option – strike price exceeds the market price of the underlying asset. How much do you pay as STT? Take the example of a trader who bought a call option with a strike price of 600 @ Rs.2.50 as he expected that the underlying security will close above 600 for the day and suppose it did close above 600 say at 603. Suppose he bought 2000 units of the call option at Rs.2.50, shelling off Rs.5,000 as premium. By normal calculation the profit should be Rs.{ (603-600)*2000 ( QTY bought) -5,000(premium paid to buy) }= Rs.1,000. However, when he received the contract note, he will see that the actual profit received by him is much less than this. The reason being higher Security Transaction Tax (STT) being charged on exercised options. The rate of STT on exercised options is 0.125% of the full value of the contract. STT on Exercised options on Expiry of Options = 0.125 % * (Strike Price + Premium) * Quantity So in the above mentioned example, the STT would be Rs. 2000 x (600+2.50) x 0.125% = Rs. 1,506.25 So he actually ended up making a loss of Rs. (1506.25-1000) = Rs. 506.25. Such huge differences in STT were troublesome for...