InvestorQ : Is it true that ITM options are traded and taxed like cash market positions? Can you please explain that that means?
Niraj Mehta made post

Is it true that ITM options are traded and taxed like cash market positions? Can you please explain that that means?

Answer
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Niraja Mehta answered.
2 years ago


That is largely correct and which is why you need to be careful if you are carrying options very close to expiry. If you close early it is ok, not otherwise. First, let us understand what is an ”In-The-Money” (ITM) option. An ITM option is an option that has a positive intrinsic value. For example, if you bought a Nifty 9950 call option at a premium at Rs.50 and the Nifty spot is at Rs.9980, then the option will be an ITM option. Thus in case of call options, if the spot price is greater than the strike price it will be an ITM option. This is despite the fact that you are currently making a net loss on the position because although you are earning a profit of Rs.30, you have already paid Rs.50 as premium. ITM is just a pure comparison of the spot price with the strike price. In case of a put option, it will be an ITM option if the spot price is lower than the strike price. Here again, the option premium paid is not relevant.

Let us now dwell upon the concept of exercise of an option. There are American options and there are European options. A European option can be exercised only on the expiration date while an American option can also be exercised on any day prior to the expiry date. An exercise of an option is different from reversing your option in the market. Exercise has nothing to do with market liquidity and can be done with the exchange even if there is no liquidity in the market. Till 2011, index options were European in nature while stock options were American in nature. However, post 2011 NSE has shifted all its stock options also to the European format.