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Why You Should Not Let Your Option Position Expire

by Abhishek   ·  May 28, 2015   ·  

Many traders trade in options and when the option premium value becomes too less they let it expire . If you have been doing this stop letting your options expire  because now you will have to pay more. 

You have to pay brokerage on expired options 

Before brokerage can be charged on the trades executed on exchanges only. But now brokers can charge brokerage   on Expiry / Exercise / Assignment of contracts on EXPIRY. Check the below circular of National stock exchange.

brokerage on expired contracts

You have to pay more STT 

When you buy/sell options stock transaction tax(STT) is levied on the option premium at the rate of 0.017%. But when you let it expire  the STT is applied on strike price at the rate of 0.125%. Lets understand it with an example

Any client buys an 500 Nifty call option of the strike price 5000 @ Rs 50 premium on 8th December . The contract expiry is on 31st December, client keeps the position open till the expiry date. On the last date of trading client has two alternatives, either he can square of the position on 31st December in the market or keep it open for the same to be closed by exchange. now if the nifty spot closes at 5010.
Spot price: 5010
Strike price: 5000
Premium earned :10
Quantity: 500
If any client has an buy option position which is squared off in the market, it will attract 0.017% of the premium value as STT on the sale transaction. But if the client keep the position open to be exercise it will attract STT of 0.125% of the settlement prices, i.e. cash market closing price * quantity.
Case 1: STT when Client square off position in the open market 
STT =  quantity x premium x 0.017% = 500 x 10 x 0.017% = 1
Case 2: STT when Position kept open and exercise By Exchange
STT =  spot price x quantity x premium x 0.125% = 5010 x 500 x 0.125% =  3131
So you can see the huge difference in the STT.  Again this will be true for In – the – money option only.   If the options are expiring worthless (with 0 value), you don’t have to sell it to save STT because STT on options which has no value is zero.   But brokerage will be applicable.
Therefore its always good to square off the options than letting it expire.

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