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New STT rule in options comes on board - effective 1 Sept, 2019
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STT is levied only on the sell side in case of intraday and derivatives trade (F&O). It is charged at the concessional rate as it is calculated on the premium value rather than on the notional value of the contract. This made trading in options attractive to many day traders.

However, there was a pain point for quite some time - When you left an ITM option to expire on the F&O expiry day then it would be treated as a delivery trade. That means the delivery STT rate of 0.125% used to be charged on the notional value of the option. For example, if you held an option on an Rs.700 strike price having lot size of 1000 shares, then the contract value would be Rs.7 lakhs. If the stock expired at Rs.705, on F&O expiry, it would be treated as ITM if you left it to expiry. So, you would end up paying STT of Rs.875, which would wipe away nearly 20% of your profits.

Under the new STT pricing, you have to pay 0.125% on the moneyness of the option i.e. Rs.6.25. Effective the STT cost of ITM options has fallen by over 90%

In the past, we had multiple horror stories coming out of retail investors where such ITM options left at expiry led to substantial losses via paying of STT. For a long time, the ITM options were not very heavily traded during expiry as they tend to become illquid with higher spreads. This makes it quite risky and hardly gathers any buying interest. With the cost of STT coming down so sharply, it is likely to encourage more trades in ITM option closer to expiry.

Not only this, we will see more hedging of options closer to expiry as earlier due to high cost, many traders used to leave the ITM leg of the hedge open due to lack of liquidity. Lower cost and higher liquidity in ITM options will help traders provide great option for traders!

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