How to save STT on ITM options on expiry day


  How to save STT on In The Money (ITM) options on expiry day

During a casual meeting in a park, Ram was boasting to his new friend Shyam how he made a killing by trading the options last month. He was also ecstatic on how he saved on brokerage charges by letting the In The Money (ITM) options to expire instead of selling it on the last day of expiry.

Hearing the last sentence, Shyam asked “How did you do that? Can you explain me a bit?”


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Ram -> “See Shyam, If we let the ITM options to expire, then they will be settled at closing price of the day and it will not be treated as trade, hence we don’t have to pay any brokerage for it, wasn’t it a smart move from me?”.

Shyam is a seasoned player in options market and know about various charges involved with it.

“What if I say, it was not that smart act as you thought it to be!”, Chuckled Shyam.

“Yes, though you saved peanut with brokerage, you did let go huge amount in terms of STT”, added shyam

“What?!, can you elaborate it to me?”, asked Ram with puzzled look

HIGH Securities Transaction Tax 9STT) on Expiry DAY of OPTIONS INDIA

Below is the summary of the explanation given by Shyam.

Lets take an example of NIFTY to understand it clearly.

Assume on 1st of October you bought 750 (10 lots) of nifty call options of strike price 8000 for premium of 150 in anticipation of market moving higher. The market indeed moved higher to 8400 by the last day of expiry.

Now near the end of the day you have two choices

  1. To let the options expire ( in this case the closing price of Nifty is used for calculation)
  2. Punch the order and sell the options.

  Securities Transaction Tax (STT) rates for Options

But the tax treatment for the above two cases make all the difference. See the NSE circular on the STT tax slabs

Security Transaction Charges India

Percentage of STT levied is different for two cases,

  1. The STT will be charged at 0.017% , if you sell it
  2. The STT will be charged at 0.125% , if you let it expire  

But the percentages will not tell all the real story until you read the next part of the circular

STT NSE India Options

  1. The tax is calculated on the premium Value, when you sell it
  2. The tax is calculated on the Settlement Price, when you let it expire!

Let us illustrate it for the example we have taken above.

Securities Transaction Charges options on expiry

So as you can see, Ram did away with Rs 7800 to save just Rs 20 brokerage charges. Yes, few discount brokers charge as low as Rs 20 per executed order. Read following article on lowest brokerage charges in India

  But how to know closing price in advance?

If you are new to stock market or if you dont know, the closing price of the day is not same as last traded price (LTP). The last traded price is the rate at which last transaction of the day is executed. However, closing price of the day is average price of the last 30 minutes of the trade. The traded price of each minute (of last 30 min) is added up and divided by 30 to arrive at the closing price of the day.

Instead of manually doing the calculation, let us show you a trick to find out the closing price in advance. Most of the trading tools will have the moving average facility in the charting window. Simply change the chart period to 1 min and plot the 30 period simple moving average on it. By 3.25PM, you will have fair idea of closing price of the day.

If you don’t have any trading software, simply go to google finance to do the same. But the catch is , google finance provides only 2-min chart. Hence, you should plot the 15 min simple moving average.

NSE NIFTY SMA

  But why two cases are treated differently?

Buying an options gives the buyer right to buy the shares but not obliged to buy at the expiry or within the expiry. Also in India, the derivative contracts are cash settled. So, if you are not selling the options till the expiry, it is assumed that you are ready to take the delivery (in this case,it is cash settled) and treated with STT rate for delivery which is 0.125%

*Read : Introduction to demat account and procedure to open it online

  Conclusion :

  • It is better to sell the In The Money (ITM) options near the end of the day instead of letting it expire
  • Do remember that, above discussion holds good only for ITM options and not for Out of The Money (OTM) options
  • Also remember, STT is levied only on sell side, hence you can short sell an options and not buy it back during expiry as you have already paid normal STT on short selling.

Ram learnt the lesson hard way.  Let us learn from Ram’s mistake and be smart and profitable traders.

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