STT Option Trap

STT TrapFellow Traders

In this month, I hope your trading has been good and profitable. As we near the expiry of the February contract, I would like to share with you an option of online trading trap that all traders must avoid during expiry.

To keep it simple and short, if you buy an option (either call or put) and let it expire (that is you don’t sell it on the day of expiry and leave an open position) and your trade results in a profit, then you will be charged STT @ 0.125% of the settlement amount.

Let me explain with a simple example. (By the way, STT is only levied on sell side for both futures and options)

Suppose you were to buy 1 lot NIFTY Call @ 6000 for a premium of Rs. 20.

On the day of the expiry, there can be two possibilities:-

  1. The option expires out of the money, that is Nifty expires below 6000. Let’s say Nifty expires @ 5950. Then the Call option is worthless and expires at Rs. 0. In this case, no STT is levied, as STT for option worth zero is zero.
  2. The option expires in the money, that is Nifty expires above 6000. Let’s say Nifty expires @ 6050. The the Call option is worth Rs. 50 (as per intrinsic value, 6050-6000).
    In this case, you can do one of two things, either you sell the option for Rs. 50 just before expiry or you let it expire, thinking that anyways you will get the profit of Rs. 1500 ((50-20)x50 (1 lot)).

This is where the STT trap catches you. If you sell the option for Rs. 50, you will be charged STT as per .017% of option premium (.017% of Rs. 50×50) = Rs. 0.425, a negligible amount. However, if you don’t sell the option, but let it expire, you will be charged STT as per .125% and that too on the settlement amount, which is 6050 (6000+50). So your STT charge will be (.125% of Rs. 6050×50) = Rs. 378 approximately.

So clearly, you stand to lose an extra Rs. 378 for 1 lot of NIFTY Call if you fall into the trap. The reason the STT is much higher is as per SEBI regulations which assumes a long open position after expiry as a delivery trade. You can check the official STT rates and conditions on NSE website by clicking.

Also, just to make things more clear, as no STT is levied on option buying, therefore you can short sell an option and not buy it back during expiry as you have already paid normal STT on your short selling.

May the odds be ever in your favour!

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