No offense to TraderRavi or any one else but I think differently and feel that revealing my thoughts might be of some help to someone. I know it does not solve the problem-at-hand immediately but if I manage to get enough folks motivated, we could take this to Court and have the tax thrown into the Ganga.
In my opinion, this
pressure to squaring-off actually tantamounts to deception.
Remember that, Option is a Contract and the expiry-time is very important subject-matter-ingredient of the contract. So, when the Buyer purchases it, he has purchased a right to hold it all the way until the end (Without any extra charges being laid against it)
Since India follows European Model, Option-Purchaser can only know the
actual TRUE worth of his Option only at its expiry.
At all times before that, it is sheer speculation (guesswork) on part of the Option-Purchaser and the Option-Writer.
One may think that his option is ATM or ITM at 3:20 PM on expiry day but it may turn out to be OTM and vice-versa.
Perhaps an analogy will help. Indian Railway operates Duronto express between few metros and it runs with zero official halts in the middle.
Passengers books ticket in Duronto from CST, Mumbai to Howrah, Kolkata and has to pay full fare between two points. On the appointed day & time, Passengers board the train and it rolls out of Mumbai as expected.
After 20 odd hours, the train halts at some phantom station 2 kms before the Howrah and announces for everyone to get down. If passengers do not get down now and wait for train to get to Howrah, they will have to pay the West-Bengal-Super-Special-Duronto-Jal-Moori-Burning-Red-Chatni-making tax.
At expiry, exposure to risk for Option-Sellers is only from ATM and ITM as OTM is risk-free anyway. Even within that, risk in ATM is negligible and serious risk exists only for ITM.
By saddling ATM/ITM Options with heavy taxes, the Option-buyer is de-focused from his contractual right and scared into squaring off his winning position and secure whatever he gets by way of compromise.
With 99.9% Option-Purchasers guaranteed to square off, Option-Writers with outstanding write positions are guaranteed to have market environment protected for them.
If some maverick Option-Purchaser holds ITM all the way through, whatever extra he gets from corresponding Option-Writer will be taken away by NSE.
As a bonus, most Option-Purchasers than will work for the Option-Writers free of cost to scare off other Option-Purchasers.