Squaring off versus exercising

[kaliadimai]

Some one please clarify this clearly.
I have a buy for 3000 lot of nifty buy call @11000.

Now on market closure spot price is 11800
So i won the bet as deep in the money deep ITM. Now i will get huge profit of
(11800-11000 )X 3000x75 = 18 crore.

In this scenario one would pay heavy STT and exercise the option right? Why one should still square of this buy call by selling just the premium value?

And next major question is at what level my ITM will yield profit even after STT? Any formula for the same?

 

[amrutham]

Some one please clarify this clearly.
I have a buy for 3000 lot of nifty buy call @11000.

Now on market closure spot price is 11800
So i won the bet as deep in the money deep ITM. Now i will get huge profit of
(11800-11000 )X 3000x75 = 18 crore.

In this scenario one would pay heavy STT and exercise the option right? Why one should still square of this buy call by selling just the premium value?

And next major question is at what level my ITM will yield profit even after STT? Any formula for the same?

STT is calculated as 0.05% of the premium value if you square off. But it is calculated as 0.125% of the total contract value, if you let it expire and the option is exercised by the exchange since it is deep ITM.

If we take your example of NF closing at 11800 by expiry,

Scenario 1: You let it expire.

In this case STT is calculated on total contract value.

Contract value = (strike price + premium)*number of lots*lot size.

Strike price = 11000

Premium = closing price - strike price = 11800 - 11000 = 800

STT you have to pay is calculated as 0.125% of (11800*3000*75) = 3318750

You will be paying a total around 33 lakhs of STT on 3000 contracts.

i.e around 1106 rupees of STT on each contract, which is approximately equal to 15 Nifty points.


Scenario 2: You square it off just before market close

If you dont want to pay STT on whole contact, you can simply square off your position just before market close.

If Nifty is trading around 11800, then position is ITM of 800 points. In ideal scenario, the premium it trade should be 800. But in real it will trade around 784-785, a difference of approximately 15 points .

If you square off your position at a premium of 785, then applicable STT is,

0.05% of (785*3000*75) = around 88K on 3000 contracts.

i.e around 29 rupees of STT on each contract, which is approximately equal to 0.4 Nifty points.


To summarize, it doesn't really make any difference if you square it off or let it expire if the position is deep ITM.

It is beneficial to square off the position if it is ITM of less than 15 points.

Hope this answers your query.

 

[kaliadimai]

Thanks sir but the main doubt is wat profit in exercising and square off

Looks in exercise i earn 18 crore minus STT?

Will i get same level of profit in square off?

 

[amrutham]

Thanks sir but the main doubt is wat profit in exercising and square off

Looks in exercise i earn 18 crore minus STT?

Will i get same level of profit in square off?

Yes. Your profit will be same in both the cases. The option premiums are priced considering the STT.

If you excecise it, your profit is 18cr-33lakh of STT
If you square it off, your profit will be approximately same.

 

[kaliadimai]

Thanks sir....so now let us say i square off and this buy is transferred to some X. Now if that X may transfer to Y. But ultimately there will be one person left with open buy who is not able to square off? Also i showed a math of 18 crore profit before STT

In my case of 11000 call strike
Spot at 11800 on expiry day 3000 lots

How will premium profit work? Will it really be in crores? Somehow i feel there is a reference boundary
When the spot crosses that boundary and goes up the exercising profit even after STT will be more than just the premium based profit