Introduction of Close to Money [CTM] – Do not exercise option on Expiry Day

A long pending systemic issue of the capital markets in the derivatives segment was the STT anomaly on expiry day in case of In the money long options. You can find the complete information on STT Trap article on the SAMCO Knowledge Center.

With effect from August 31, 2017, the exchanges NSE and BSE have provided a “Do Not Exercise” facility to stock brokers to mark contracts as NOT EXERCISED.

What is the DO NOT EXERCISE option?

The exchanges have provided stock brokers with a window where a list of contracts which are Close to the money and will be exercised by default. From the list, the brokers have to mark the contracts where they would like to avail the “DO NOT EXERCISE” option.

When the “DO NOT EXERCISE” option is marked by the broker for in the money option contracts, the client will NOT get the premium on settlement and will also NOT be liable for the STT payable on exercise which is at 0.125% of full exercise value of Strike Price + Premium.

Why will the Premium not be receivable by clients in case the DO NOT EXERCISE option is availed?

In case the DO NOT EXERCISE option is availed, it simply means that the option buyer has forfeited his right to exercise the contract and on account of this forfeiture, he is not liable to receive the settlement difference. So for example, if Banknifty expires at 24201 and a client holds a 24200 call on expiry. In normal case the client would be receive Rs. 1 (24201 – 24200) as premium on settlement and would end up paying STT of Rs. 30.25 (0.125% * 24201) and would net end up paying Rs. 29.25.

In the above case if the DO NOT EXERCISE option is availed, the client would not receive the premium of Rs. 1 but at the same time would not be liable to pay Rs. 30.25 and therefore would end up saving net Rs. 29.25.

Which Contracts will be marked by SAMCO under the DO NOT EXERCISE facility?

SAMCO will select the contracts to be marked as “NOT EXERCISED” with a simple principle i.e. If the STT payable on exercise exceeds the premium receivable on settlement, then SAMCO shall mark those contracts as “DO NOT EXERCISE”.

All those contracts where the Premium receivable on settlement exceeds the STT liability will be continued to be exercised and clients shall receive the net credit of Premium – STT in their contract notes and ledgers.

If clients have any questions with regards to the same, they can raise a support ticket on the SAMCO Helpdesk.

 

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