For Stock Options:
In-the-money (ITM) contracts are physically settled. The holder of an ITM option will automatically exercise the option, resulting in the purchase or sale of the underlying stock at the option’s strike price.
Out-of-the-money (OTM) contracts expire worthless. In this case, the entire premium paid for the option is lost.
For Index Options:
If the index options are bought:
Contracts expiring ITM are cash-settled. Securities Transaction Tax (STT) is charged on exercised contracts at the rate of 0.125% of the intrinsic value (how much in the money the option is), multiplied by the quantity. Brokerage fees are charged on both sides, i.e., when the options are bought and when they are settled on the expiry day.
Contracts expiring OTM expire worthless, resulting in the loss of the entire premium paid for the option.
It’s important to note that STT is charged only for the sell-side, so there will be no STT impact on expiry if the option was bought. The trader’s profits or losses will depend on the moneyness of the option contract and whether it was bought or sold.
