Advantages of Squaring LONG OTM Options at Expiry

Square

Active Member
#1
I have observed that on the expiry day, Nifty OTM Options are squared of at Rs. 0.05 (i.e. 5 paise, which is the lowest possible price for any Option).

There are a very huge quantity of order book and also trades at Rs. 0.05 that happen for all OTM options, Puts or Calls post 3:15 pm on expiry day. I would like to know why people SQUARE OFF their loss making LONG position on OTM Option by selling at Rs. 0.05. I am sure that the sellers are not fresh sellers but only people wh0 already were buyers earlier and are now Squaring off their long positions of these OTM options.

I mean why square off even at Rs. 0.05, pay brokerage, taxes etc , WHY not allow the loss making position expire worthless so no need to pay, brokerage, taxes etc.

Are there any advantages of Squaring LONG OTM Options at Expiry?
 

Square

Active Member
#2
Everyone sailing in the same boat as me or is it that someone knows why the loss making OTM options are squared at Rs. 0.05 while paying brokerage and STT and other charges.

Does it have any impact on Taxation if the positions are not squared off vis a vis squaring off at 5 paise
 

OneThatGotAway

Well-Known Member
#3
Last edited:

Ajax

Well-Known Member
#4
OTM option expires worthless. That is, its value is zero. NSE exercises it. OK
But what STT etc charge you will pay on ZERO, whatever the rate may be.
lotsize*exercise price(zero) = zero.
Furthermore STT is applicable only on SELL .

No point trying to sell at 0.05 value. you pay brokerages n associated charges.
Let is expire. in OTM option no charges on expiration.

However, if option in ITM, and you let it expire. NSE exercises it.
Then STT on whole lot*settlement price is applicable.
In deep ITM options liquidity is not good, and bid ask spread is wide, and you may not get good price if you try to sell.
Again, if its DEEP ITM , you don't loose much BY WAY OF STT. better to let NSE exercise it.

Only, if its marginally ITM then , STT charge can be relatively huge, as 1 Zerodha guy found out to his 54lac loss.
Then it makes sense to sell it, rather than letting NSE exercise it.

Why traders are selling even at 0.05, because settlement price is weighted average of last hour of trade, which you have no way to discover beforehand.
So, if you bot Option and at expiry , its hovering around ATM price. You don't know what final settlement price will be. Seemingly marginally OTM option may turn out to be marginally ITM at the end. Then you pay STT at lot*settlement price which can offset little profit you made.

To summarize. STT only on SELL side.
if at expiry, your buy option is Deep ITM, you may let is expire, if liquidity not good. STT will be fraction of your total profit.
If your bot option is hovering around ATM price, better to sell and get out. Then STT will be on SOLD price and not on lot*SOLD price.

Hope that helps.
 

Square

Active Member
#5
Thank Ajax,

I agree that around ATM strike or even +/- 100 OTM strike, there would be some interest in buying selling even at 0.05, but this is the case even with Deep OTM strikes post 3:15 that the trades happen at 0.05. I am sure that the traders (buyers and sellers both) know that these strikes (Put or Call) will never become ITM since the trading activity happens post 3:15 and all these are Deep OTM options.

I was trying to understand why people buy and sell Deep OTM at 0.05, and these trades are very large in numbers with very low value, obviously since they are traded at 0.05. I am convinced that these trade are not fresh positions and all tradere are squaring off their respective Long or Short positions. But why do it when you have to pay brokerage, STT (in case of traders on the sell side), exchanges charges etc. If the trades (buy or sell) do not happen at 0.05 then both traders (buyers and sellers) can save on these charges.

So there is definitely something I am missing here for which I thought of getting answer in this forum.
 

Square

Active Member
#6
Answer is STT trap
https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx

If you let it expire worthless then NSE wil exercise it
And if that happens Then STT is calculated as per
nifty futures (Spot nifty value) hence u will end up in loss .

Advantage of u squaring off is that u pay brokerage + STT only on transaction amt which be very low i.e 0.05 only (Premium amt only ).........
You are talking of ITM options on which the STT thing will impact, but on OTM which expires worthless this will have no impact at what Ajax mentioned.

My query was relating to OTM options, which expires worthless at Expiry.
 

Square

Active Member
#7
To put it simply, for example there are two traders A and B

A day before the expiry A buys one option at Rs. 50 from B. So B is seller and A is the buyer.

Now close to expiry the option becomes Deep OTM so it value is close to zero.

Why would A sell it at 0.05 and B buy it 0.05 and square of their respective positions and incur transactional costs?

Why would they both not let it go as it is and not do any further transaction and save money?
 

Square

Active Member
#8
Or to put it the other way, does it make a difference if one buys options and they become OTM on expiry and he does not square it off. What would be the difference of squaring (at 0.05) or not squaring it at all. 1) in terms of financial implication, 2) in terms of Taxation and 3) computing Turnover for taxation.

Hope regular Option experts/traders can explain.
 
#9
Basically, on expire day a lot of these OTM options are bought intraday and not on Delivery basis, due to low marging requirements for intraday. They are forcefully settled by broker at 3.10 or 3.15
 

travi

Well-Known Member
#10
Basically, on expire day a lot of these OTM options are bought intraday and not on Delivery basis, due to low marging requirements for intraday. They are forcefully settled by broker at 3.10 or 3.15
Unless its on institution level, correct me if i'm wrong, but I've not seen leverage on buy side. Full margin is blocked.
Logic is that if something very frequently goes from inr. 100 to 5 in the blink of an eye, I don't which RMS allows this.
 

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