The BSE will introduce a facility on index and stock options contracts wherein trading members can opt for a `do not exercise' instruction on certain in-the-money contracts on expiry day .
The facility will be a relief for brokers and traders as the letting the profitmaking options positions expire could potentially lead to enormous losses for options traders.
In the case of options trading, the securities transaction tax (STT) is around 0.05% on the premium and STT on exercising an option is 0.125%. When an option is exercised, STT is paid on the entire value of the option and would imply massive liability for an unsuspecting trader.
NSE, which is the market leader in equity derivatives, is yet to announce this facility, but brokers say they expect the exchange to announce a similar system soon.
Currently , all open long positions across in-the-money options contracts are automatically exercised and cash settled.
Under the new system, a file containing client-wise close-to-money open long positions will be provided to trading members on Extranet by 4.30 pm and the trading member has to respond "N" against positions which he does not want to excercise, within the time window of 30 minutes.
If a response is not provided by 5 pm or if the information provided is incomplete or invalid, then the existing procedure will apply , wherein the client-contract long positions will be automatically exercised.
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