Why the stt for ITM option are so high?
It is very important for an Option trader to understand the STT (Security Transaction Tax) applicable in case he squares-off the position on the expiry day or if the position is exercised by the exchange in case of ITM(In-the-money) option.
Let us take the following two scenarios for better understanding of the STT charges.
Scenario 1: Buy 1 lot of Nifty call option with a strike price of 9000 at Rs.90 and sell it at Rs 100. The STT charged will be Rs 0.425.
(75*100*0.017% = 1.275) i.e. (Quantity * Premium * 0.017%)
Note: STT of 0.017% is charged only the sell side.
Scenario 2: Buy 1 lot of Nifty call option with a strike price of 9000 at Rs. 100 but don’t sell it and let it expire on the last day of the contract.
Now on the day of the expiry if the Nifty Spot closes at 9100, then the call option will be ITM as the Spot price > Strike price & the STT charged will be Rs. 853.125.
(9100*75*0.125%) = 853.125 i.e. (spot price *Qty*0.125%).
Note: STT OF 0.125% is charged, where option is exercised by the exchange otherwise sell side STT is .017%
That is why it is very important to square off all the ITM options on the expiry day,or else the traders has to pay huge sum of money as STT.