8.11 India specifics: contracts, settlement and STT

Motivation

The mathematics is universal; the contract terms are local and change often. A pricing error from a wrong lot size or settlement rule is still an error.

Index and stock option contracts#

Contract terms (as of 5 Nov 2026 unless stated)

Nifty 50 options are European-style and cash-settled against the final settlement price of the index on expiry day (NSE contract specification pages; the settlement method is set by SEBI's circular of 15 Oct 2026, para 4.9). Lot size 65 (NSE circular NSE/FAOP/70616 of 3 Oct 2025). NSE expiries moved to Tuesday for contracts expiring from 1 Sep 2025 (NSE/FAOP/68589 of 17 Jun 2025, under SEBI circular SEBI/HO/MRD/MRD-TPD-1/P/CIR/2025/76 of 26 May 2025); when Tuesday is a holiday the expiry moves to the previous trading day (NSE/FAOP/68747). Nifty has weekly expiries plus monthly, quarterly and half-yearly series; the 5 Nov 2026 bhavcopy listed Nifty option expiries on 9 Nov (Mon), 17 Nov, 23 Nov (Mon), 1 Dec, 8 Dec, 29 Dec 2026 and longer-dated series out to 24 Jun 2031.
Bank Nifty options: European, cash-settled, lot 30, monthly and quarterly expiries only. NSE has had no Bank Nifty weeklies since SEBI's 1 Oct 2024 circular limited weekly expiries to one benchmark index per exchange (effective 20 Nov 2024).
Stock options are European-style for contracts expiring from 27 Jan 2011 (SEBI circular CIR/DNPD/6/2010 of 27 Oct 2010 let exchanges choose the style; NSE's switch date as reported by Business Standard, 29 Oct 2010) and physically settled: an ITM stock option at expiry results in delivery of shares, so a long call holder must pay $K\times$ lot in cash and a short call writer must deliver shares. SEBI's review of stock derivatives (circular SEBI/HO/MRD/DP/CIR/P/2018/67 of 11 Apr 2018) began the move to physical settlement, and circular SEBI/HO/MRD/DOPI/CIR/P/2018/161 of 31 Dec 2018 made it mandatory for all stock derivatives, in three batches from the April, July and October 2019 expiries. Brokers raise margins in expiry week and may close positions themselves; check your broker's policy (M09A · 9A.14).
Settlement price mechanics. SEBI's Closing Auction Session went live on 3 Aug 2026 for F&O stocks (circular of 16 Jan 2026), and the circular of 15 Oct 2026 bases expiry settlement from 7 Dec 2026 on the last 30 minutes of continuous trading: the index value computed from the constituents' VWAPs for index contracts, the VWAP across all exchanges for stock contracts (para 4.9; M01 · 1.2). For pricing this is a detail; for expiry-day traders it decides which minutes matter.
Premium and margin. Option buyers pay the premium upfront (in full, from 1 Feb 2025 under the 1 Oct 2024 circular). Writers post SPAN plus exposure margin (M07 · 7.4), with an extra 2% ELM on short index options on expiry day.

STT and the exit decision#

STT on options (from 1 Apr 2026; Finance Act, 2026, as set out in NSE circular NSE/FATAX/73524, fetched 6 Nov 2026). Securities Transaction Tax is 0.15% of the premium on the sell side of an option trade, and 0.15% of the intrinsic value on options that are bought and exercised, charged to the buyer. Before 1 Apr 2026 the rates were 0.1% and 0.125%.

Worked example 8.12closing versus holding to expiry

You hold one lot of the Nifty Dec 24,500 call. On expiry day Nifty is at 24,800.

Hold to settlement at 24,800: intrinsic value $300\times65=\text{₹}19{,}500$ is paid to you; STT on exercise is $0.0015\times19{,}500=\text{₹}29.25$ .
Sell the option shortly before the close at, say, 302 points: premium $302\times65=\text{₹}19{,}630$ ; STT on the sale $0.0015\times19{,}630=\text{₹}29.45$ ; plus exchange transaction charges of 0.03553% of premium (₹6.97 at the NSE rate in force from 1 Mar 2026) and brokerage (typically ₹20 per executed order at a discount broker; set your own).

At current rates the two STT bills are nearly the same, because both are 0.15% and an ITM option near expiry trades close to intrinsic value. The choice now depends on the exit price you can get versus the settlement price and on other charges, not on an STT penalty. Check the rates in force before relying on this.

Practitioner notes

Price Nifty options with Black-76 off the matching future or an option-implied forward. Use the futures delta for hedging.
A European option cannot be exercised early, so American-style reasoning (Proposition 8.2.4) never applies on NSE. Early "exit" is always a sale in the market.
In FY26, 59% of index-option turnover was in contracts on their expiry day (0DTE) (SEBI FY26 study; M01 · 1.11 Case 1). The Greeks in 8.9 show why that is a different game: theta, gamma and the settlement mechanism dominate, and the BSM assumptions are at their weakest.