In the Money options and STT - Educational series 7

2017年4月18日

Hi All ,
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Context is India Market
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Lets see today the STT (Securities transaction tax) trap for in the money options which are not squared off before expiry. (If you don't square off its called option exercised)


First of all let's understand what is In the Money (ITM) option call /put ?


Let's say Nifty spot price 9150

Now if you buy 9100 Nifty calls , You are buying ITM call option i.e the spot price of underlying is greater than the strike price of contract.

Similary if you buy 9200 Nifty puts , You are buying ITM put option i.e the spot price of underlying is below the strike price of contract.

Now to the STT trap:
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Normal STT charges :

STT is calcualted as 0.05% of sell side premium value , i.e while buying option you don't pay STT but while selling option you pay STT.

Example
Let say you Have 9100 Nifty call options (1lot=75) bought at 10 rs and you sell at 20 rs
while buying no STT , while selling 20x75x0.05/100 = 0.75 RS is STT charge per lot .

Now instead of squaring off before expiry you let it expiry and say nifty closes at 9120 , you naturally expect that you will get 20 RS on 9100 option.

Now the catch is this is option exercised
so STT is calculated as 0.125% of the entire contract price , I repeat " entire contract price"
Full Contract price in our case is (9120 X75 ) so on this STT will be calculated
i.e 9120x75X0.125/100= 855 RS is charge

So 0.75 Rs and 855 Rs per lot considering the ITM option value which are squared off and
exercised respectively, more the value of ITM contract more will be charges in second case.


Please note there is no STT for Buying options , So if you have shorted options you have already paid STT so even if they get exercised no problem.

Currency Market does not have STT in india currently(Please correct if i'm woring on this).

Suggestions /Correction welcome

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Watch this space:
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One more eye opener on Dividend and contract price of futures /options will be posting soon.