Options Settlement....Some concerns...

[tradingstar]

Hi All,
As an ill informed investor I did loose some money during the F&O expiry this month. I wanted to know from the knowledgable people
out here if what my broker is claiming is correct!

I had purchased 1500 BANKNIFTY 11600 CE, OCT expiry @ an average rate of 11.45Rs. On the day of expiry BANKNIFTY closed @ 11616 and the option that I had bought closed @ 10.15Rs. I let the option expire thinking that I will get 1500*10.15Rs = 15225Rs. But I was aghast when my broker informed that
I will get only (16-11.45)=4.55*1500 = 6825Rs.

My broker is claiming on expiry the banknifty closed @11616 and since I had purchased 11600 call the premium is 16 Rs and since my average buying
price is 11.45Rs the difference of 16 & 11.45 multiplied by the total quantity(1500) is what I get. I am really not sure if this calculation is right
since I beleive on the expiry what the broker has to pay got nothing to do with myy average buying price. On contrary if my avg buying price for the
same option was say 1Rs in this case my broker is obliged to pay me 16-1=15*1500=22500Rs? This sounds non-sense to me but may be I am not aware how it
is done. Could some intellectual throw some light on this?

Best Regards,
PB

 

[KRISHXNG]

When did you buy it? If you bought it on expiry day then the broker is right.
Buy Price - 11.45
Sell Price - Since it expired at 11616 - 16
So obviously profit is Sell - Buy price = 16-11.45 = 4.55

If you bought it a few days before expiry then they would have charged you then for the buy and on expiry you should have been credited 16Rs.

 

[tradingstar]

Thanks for the reply.

I bought on the same day. What you are talking about is the net flow. But what I am talking about is not the the net flow.

I invested 1500*11.45=17175Rs
My broker says I will get back = 1500*(16-11.45)=6825Rs

So my net loss is 10350Rs whereas I beleive I should be in profit?

 

[KRISHXNG]

If you bought on the same day, then broker might be telling that your net flow (inflow) for the day is 6825 (nothing gets debited, only a credit) and not Outgo of 17K and then inflow of 6.8K.

 

[tradingstar]

Krish thanks for the prompt response.

This is what I thought.

So it also means that the settlement amount has no relationship with the closing price of the option on expiry(10.15Rs)?

 

[KRISHXNG]

10.15 is the last traded price of the option, don't think it is the closing price.
Anyhoo, in options that are let to expire the P/L are calculated based on the spot index/stock price at expiry.

 

[tradingstar]

I had a shocker today from my broker(Edelweiss)

They have charged me STT of 21750 saying that since I had bought 11600 Call Oct expiry and on the day of exipry I let the option expire so in this case they consider that I have exercised the option, hence STT charged would be 11600(strike)*(0.125/100)*1500=21750

I am amazed by it, since my total turnover for the buying of the same option was 1500*11.45=17175Rs for which I am paying STT of 21750Rs. Someone here could please let me know if the notion of letting an option expiry means exercising the option?

Also if they consider that I exercised the option what should be the amount due to me?

My buying price = 11.45
Quantity bought = 1500
Closing price of the option = 10.15
Closing of banknifty on expiry = 11616

In this case should they not have credited me (11616-11600)*1500 = 24000?

 

[bkb]

Hi,
As per my understanding:

Initial outgo: 1500*11.45=17,175
Credit for In the money call option excercised: (11616-11600)*1500 = 24,000
STT ( as per your post): 21,750

So net cash flow = -17175+24,000-21,750 = 14,925

Cash outflow of 14,925 (plus brokerage on initial purchase of CE).

Please note, STT will be charged on notional contract amount (strike amount * numbers of units).

On expiry, In the money(ITM) options are automatically excercised by exchange, if the position is not closed. In your case, BANKNIFTY closing above your CE strike price would result in your CE turning ITM.

So even if assuming BANKNIFTY had closed at just 11601, your option would be ITM and it will be excercised (assuming it was not closed). Here also the same huge STT will apply and loss could have been larger to that extent.

 

[THETRADER]

Please note, STT will be charged on notional contract amount (strike amount * numbers of units).

STT for in the money options on expiry is charged at 0.125% of the settlement price. The settlement price is defined as the closing price of the underlying on the day of expiry. It is interesting to note that even a futures contract attracts only 0.017% as STT.

The OP would have been better off if BankNifty closed at 11600 or less, where he would not have to pay anything more!

I had given this info here,
http://www.traderji.com/options/70680-stt-option-exercise-expiry.html#post694512
while there are 600+ views, and no replies!

 

[tradingstar]

Guys,
Thanks for insightful views. This is a strange case where one looses money even if the option expires in the money and the difference(16) between the underlying instrument(11616) and the strike of the option(11600) is higher than the buying(11.15) price of the option itself

Now how I wish the option could have closed out of money so that I could have avoided STT charges of 21750Rs

I was fighting with my broker and now I know I were wrong...

Best Regards,
PB