“Do Not Exercise” Option’s

Do Not Exercise

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 the brokers as well. The exchange would debit the loss from the broker’s account and if the client did not have funds broker had to bear the loss. With a small client exposure broker would face a huge potential risk.

*Starting Aug. 31, 2017, the exchanges have issued that a member broker can instruct and send a “Do Not Exercise” directive so that your Close To Money (CTM) Option contracts open positions will NOT be exercised automatically on the expiry date. 

*SAS Online shall mark a “Do Not Exercise” instruction to the exchange for all such CTM contracts where the applicable STT is more than the receivable premium on the exercise of such CTM contract.

 

  • In this case trader will neither receive any premium nor would he have to pay STT despite them being in the money. Hence at an expiry of 8601 in a 8600 call option you will not get anything back, not even the Rs. 1, and also you won’t have to pay the STT, as the option has not been exercised.

  • The above applies to the nearest in-the-money options which are the three call strikes BELOW the closing price, and three put strikes ABOVE.

4 Comments

  1. I bought 2 lot of banknifty 25000PE at Rs 79.50 how many Sgt will be liable to pay.i bought above option before the market close on Wednesday.

    Reply
    • Hi Sanjeet,

      If the option is in the money(ITM) and if its exercised then you will be charged STT according to 0.125% and if you sell before market closing 0.05% on Sell Side(on Premium).

      Reply
  2. Terrіfic post but I was wanting to know if you could write a ⅼitte more on thіs topic?

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    Reply
    • Thanks for the appreciation. We will keep updating with more stuff.

      Reply

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