Losses due to STT on Notional Value of in the money Options on Expiry Lesson for Discount Broker

MewarLion

Active Member
#1
All In the Money ( ITM ) Option Buy Position not squared off ON EXPIRY DAY result into automatic exercised. Option Buyer has to pay Securities Transaction Tax on Notional value of Option i.e Strike Price multiplied by quantity.


Take Yesterday's i.e 13th July 2017 case of Bank Nifty Put Option Strike Price 23900 Final Settlement Price 23888.65


Bank Nifty was trading above 23900 on majority of last half an hour , which computes closing prices for settlement . Market Participant in fact all option writer in this Strike price were expecting BANKNIFTY close above 23900 so there were no buyer in 23900 Put Option and all option buyer were standing as seller in 5 paise but could not sq off as there were no Buyer.


One can understand Option Buyer's lack of knowledge or not monitoring position actively assuming this is OTM but how Option writer failed to sq off and finally ended up paying 12 points where they had an opportunity to sq off at just 5 paise.


I request All participant to contribute on the following line :

  1. How to prevent losses due to STT on Notional Value in such cases
  2. How to prevent Default by Client to Stock Broker due to levy of STT
  3. Why Option Writer ( smart option player ) missed sq off and finally ended up paying much more
  4. How client can avoid last minute Buying of Such Option
  5. How Stock Broker esp Discount Broker like Zerodha , RKSV , TSO , SAS can prevent this ?
 
#2
Please accept my congratulations for taking up such an issue.

3. I can only tell you that the Option Writer, as you had already said smart player, could have hedged it with some strategy, like selling futures for having sold PUTs, etc.,

There were many posts regarding this, and surprisingly not much response, and sadly not much response from our fellow traders. Even Chirag Gupta's petition in change has not received much response, just about 8000 when Zerodha alone has more than 3.5 lakh clients! And sadly, none of the authorities, NSE, SEBI, FM have given any response. Chirag lost 18 lakhs for a paltry investment of Rs.11,250! Brokers have been advising people to close their ITM positions just before the expiry, though!

But the point remains is, that STT is absolutely illogical, and even defies the logic of buying options, where the risk is limited to the premium paid! I am considering taking up this issue with support from our Traderji members and other traders, which would involve considerable amount of time and money, of course!

Please 'Like' to this comment, if you are willing to support me either monitarily or by time or even by being with me in this cause.
 

headstrong007

----- Full-Time ----- Day-Trader
#4
All In the Money ( ITM ) Option Buy Position not squared off ON EXPIRY DAY result into automatic exercised. Option Buyer has to pay Securities Transaction Tax on Notional value of Option i.e Strike Price multiplied by quantity.


Take Yesterday's i.e 13th July 2017 case of Bank Nifty Put Option Strike Price 23900 Final Settlement Price 23888.65


Bank Nifty was trading above 23900 on majority of last half an hour , which computes closing prices for settlement . Market Participant in fact all option writer in this Strike price were expecting BANKNIFTY close above 23900 so there were no buyer in 23900 Put Option and all option buyer were standing as seller in 5 paise but could not sq off as there were no Buyer.


One can understand Option Buyer's lack of knowledge or not monitoring position actively assuming this is OTM but how Option writer failed to sq off and finally ended up paying 12 points where they had an opportunity to sq off at just 5 paise.


I request All participant to contribute on the following line :

  1. How to prevent losses due to STT on Notional Value in such cases
  2. How to prevent Default by Client to Stock Broker due to levy of STT
  3. Why Option Writer ( smart option player ) missed sq off and finally ended up paying much more
  4. How client can avoid last minute Buying of Such Option
  5. How Stock Broker esp Discount Broker like Zerodha , RKSV , TSO , SAS can prevent this ?
One can understand thread starters lack of knowledge now.
But, before opening a thread for discussion about a topic, first, any member must try to learn the basics...And beginners may get wrong info about options writing..


Do remember that if you are short/written options (sold first), you have already paid STT and it doesn’t matter if you want to buy the options on the exchange or hold them till expiry to square off, there is no STT on the buying side.

Any option writer(i.e selling first) would have already paid the applicable STT. In both the cases which is you buy on the exchange or if you let it expire at Rs 0.05 or whatever price ABOVE ZERO.
You don’t have to pay any STT at all, i.e STT would be zero for you since you had already paid STT when you had shorted the options( @0.05% of the premium, which is negligible).

---------------
Discount Brokers like Zerodha , RKSV , TSO , SAS good enough to handle such novice options buyers. They square off big positions forcefully many times if there is not enough capital to recover the total loss...



 
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Traderji

Super Moderator
#5
As per the information we received from various stock brokers, many customers were trapped in yesterday’s disaster. This will eventually result in to bad debit for the brokers. The amount is in lakhs of rupees for top 20 brokers.

Here are quotes from some of the top executives from brokerage community.

yesterday was the expiry of the weekly bank nifty: the high closing came close to a lot of strike prices: in case of expiry the stt is quite high almost rs 30 plus so a lot of brokers were uncovered for the stt costs.
The weekly options have increased the risk for brokers 4 times. There is nothing much a broker do to handle this situation. SEBI has to fix this issue asap.
This issue is critical for discount brokers as they run on razor thin margins.
 

headstrong007

----- Full-Time ----- Day-Trader
#6
Brokers asking for the same for many years, SEBI knows it all, but such decisions depend on Central Government only. The tax goes to Government. Still Govt is not interested. Already a lot of traders signed such petitions in change.org. Still no hope..

Smart RMSs square usually square off such positions forcefully around 3:20-25PM @ market price. Still, some novices are creating huge new buy positions in last 10-15 mins with cheap options... Only such huge buy positions are creating the problem...Brokers are flashing such messages for square-off in terminals repeatedly. ..........

But as we all know,
Albert Einstein: 'Two things are infinite: the universe and human stupidity; and I'm not sure about the universe.'

Trading will always remain a dangerous business, bcoz there is no entry bar, no check of the minimum required knowledge in that field...Brokers have to be careful from the stupidity of the beginners...
 
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princy01

Well-Known Member
#7
I think people who don't understand options buying in last 30 minutes are at fault too

Why they do something what they don't even fully understand

For people who do not know about sellers in options

Options sellers don't need to buy options at expiry if it's going to be zero or not zero , they are not at risk at all

Only in the money bought options are to be SOLD at expiry

It's possible to square off even at 3.25 pm if option is in the money, I am damn sure it was possible for 23900 put to be square off, i will look at charts and confirm tomorrow

How come no one is talking about the stupid buyer after 3.00 pm on expiry day?


Which doctor ordered to do trading in options buy without understanding its consequences? Without knowing about it inside out?
 
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headstrong007

----- Full-Time ----- Day-Trader
#8
Yes as far as I remember the volumes bars, few millions of in the money 23900put bought & sold in 3:15-3:28PM. Even in last few minutes Option writers selling it constantly Rs 8-7-6-5-4 options and some beginners/novice buyers were opposite sides of the trades as always.

Most importantly all those huge STT in lakhs goes to the Government every week... The Same Govt just increased the intraday STT 3 times recently as options volumes are increasing...

Just like traders same 'The survival of the fittest' rule is applied to all Discount Brokers also...Only those who can manage the risk for the long term would stay.
 
#9
Bank Nifty was trading above 23900 on majority of last half an hour , which computes closing prices for settlement . Market Participant in fact all option writer in this Strike price were expecting BANKNIFTY close above 23900 so there were no buyer in 23900 Put Option and all option buyer were standing as seller in 5 paise but could not sq off as there were no Buyer.

@MewarLion
I missed this point completely! I thought you were referring to the Rs.11.35 that had to be paid by the 23900 PE option seller, as against squaring off at 0.05! And from 3:00pm to 3:22pm, BankNifty was below 23900. Futures usually track the average, but there are exceptions!
@headstrong007 Thanks for pointing out.

BTW, few lakhs for discount brokers is nothing, considering the volumes that they are doing. So the authorities will not bother about this. But unnecessary loss is a great loss anyway.

All kind of representation has been made.
@MewarLion
I agree, but that has not produced any useful result.

I feel that the representation had been made incorrectly. I believe that I have enough material on this. I intend to tread a different path, by which people who had their ITM options exercised and charged STT should be able to

GET THEIR STT BACK ALMOST FULLY, ALONG WITH COMPENSATION AND POSSIBLY EVEN A BONANZA!

That is the reason I wanted to know how many would support this cause! I have only asked for people to 'Like' and even for that, there is hardly any response!
 

princy01

Well-Known Member
#10
Bank Nifty was trading above 23900 on majority of last half an hour , which computes closing prices for settlement . Market Participant in fact all option writer in this Strike price were expecting BANKNIFTY close above 23900 so there were no buyer in 23900 Put Option and all option buyer were standing as seller in 5 paise but could not sq off as there were no Buyer.

@MewarLion
I missed this point completely! I thought you were referring to the Rs.11.35 that had to be paid by the 23900 PE option seller, as against squaring off at 0.05! And from 3:00pm to 3:22pm, BankNifty was below 23900. Futures usually track the average, but there are exceptions!
@headstrong007 Thanks for pointing out.

BTW, few lakhs for discount brokers is nothing, considering the volumes that they are doing. So the authorities will not bother about this. But unnecessary loss is a great loss anyway.

All kind of representation has been made.
@MewarLion
I agree, but that has not produced any useful result.

I feel that the representation had been made incorrectly. I believe that I have enough material on this. I intend to tread a different path, by which people who had their ITM options exercised and charged STT should be able to

GET THEIR STT BACK ALMOST FULLY, ALONG WITH COMPENSATION AND POSSIBLY EVEN A BONANZA!

That is the reason I wanted to know how many would support this cause! I have only asked for people to 'Like' and even for that, there is hardly any response!
Expectations is not equal to reality in the market

I was for one damn sure that close will be below 23900, banknifty hardly went above 23900 let alone stay there to make a close above that

So I don't know what kind of close you are talking about above 23900

I don't know why you think someone should buy option at 3 pm on expiry day

Options have always been a sellers market and people without understanding the full details about it trying to make money............ Probably don't deserve that money.

There are full 7-8 days to make money by buying options even weekly banknifty options............. Then why concentrate on 30 minutes?

Only 30 minutes game and you think options should not have stt imposed?

What kind of arguments are these?

Traders if they know their game stand to make lacs of rupees and you want government to not take pie from that?

Even if they do not make money, it should be a free opportunity for traders and no charges like stt?............ No government can and will do this.

This thought in itself is ridiculous on traders part
 

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