Understanding STT in Detail

Let’s jump right to the point.

Everyone hates taxes. Except these guys who are clearly high on something.

Securities Transaction Tax (STT) in India is charged as follows

When you are the seller of an option — 0.05% of the Premium

When you are the buyer of an option, it goes in the money, and is exercised- 0.125% of the Underlying Stock Price

Read that again.

Yes. Of the underlying stock Price.

Of the entire damn underlying stock price.

The whole m0+#3|@**|<|<Ig underlying stock price.

If my gangsta expressions did not drive that point into you, let the math do the job.

The Math

NIFTY is at 10000. I sold you a NIFTY 10000 Call at 100 Rs.

STT = Premium*Lot Size*0.05% = 100*75*0.05% — a measly 3.75 Rs. Not even a small Gold Flake cigarette comes for that money. Even 5 years back.

Now NIFTY goes to 10150

Your Profit = (Option Value — Premium)*Lot Size = 150–100 = 50 Rs *75 = 3,750 Rs

STT per option = NIFTY Price*0.125% = 10150*0.125% = 13 Points!

STT per Lot = NIFTY Price*Lot Size*0.125% = 10150*75*0.125% = 950 Rs.

That is almost 25% of your profit!

So instead of letting it expire, you should square it off with me. In which case you are the seller of the option and you just need to pay a measly 3.75 Rs.

This much, everyone tells you. Now let us go deeper. And as usual, we do rage comics.

I am stuck with a NIFTY In The Money Option I purchased from you

If I let it expire, I will have to pay 13 points STT, which means I make 37 bucks and you lose 50 bucks

By squaring off I get 43 instead of 37, and you will lose only 43 instead of 50. Win Win!

But does this actually happen in the market? Look at some liquid options (NIFTY and BANK NIFTY) on the day of expiry with 10 minutes to go. What say?

Spoiler: It works. The option price will be lower than the theoretical price by half of STT. Turns out that thousands of buyers and sellers act in their self interest like some game theory scenario. They co-operate to avoid STT and square off at the half-way mark.

On Square off

If you are a buyer, the payoff you get is higher by half of STT. 
If you are a seller, the payoff you pay is lower by half of STT. 
So whether you are a buyer, or a seller, square off to get a better deal!

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