Bought options on Monday, sold on Tuesday, after which I bought options immediately and got charged a penalty, why?

This happend very recently. It was quite shocking to know that most of the profits I made were wiped off because of some exchange/Sebi policy which is very hard to understand.

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Hi Nandu,

To understand why a penalty is levied, you’ll need to have a fair idea about the Settlement cycle and the concept of Margin reporting in India.

The settlement cycle in India for Equities is T+2 and for F&O is T+1. What this means is that when you sell Equities and receive money as sale proceeds, such sale proceeds can be withdrawn only on T+2 day. So assume you sold stocks worth Rs.1,25,000 on Monday, you would be able to withdraw these funds only on Wednesday (Monday - T-Day, Tuesday - T+1 Day, Wednesday - T+2 Day). Similarly when you sell F&O positions you would be able to withdraw these funds on T+1 day only.

The important thing to note here is that whenever you sell an Equity position or an F&O/CDS position, only on the respective settlement day the funds become ‘YOUR’ funds. From the time you sell till the time its settled, they would be considered encumbered funds.

Margin Reporting: Whenever you take a position in the F&O/CDS Segment, the Exchange requires all brokers to report the funds available for such positions taken by client on a client to client level. So if you buy Nifty Options for a lac, the Exchange would ask your broker of the availability of funds in your account and report the same to the Exchange. While reporting the availability of funds, your broker is required to consider only ‘free’ or ‘unencumbered’ balance. Any short reporting will attract penalty. So if your broker allows you to buy options worth Rs.1, 00,000 with only Rs.60, 000 in your account, the shortage in your account would be Rs.40, 000 on which a penalty is levied.

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Venu does this happen always, cause we’ve never seen such a scenario before. And if this is the exchanges process then why do brokers let the client take the position in first place and even if they do, they can square it off as intraday trade rather than client incurring the penalty

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Hi Rakesh,
This is the way brokers are expected to report margins. If a broker reports short margin the penalty is either 0.5% or 1% of the short reported margin, however if the broker reports wrong margins, penalty is 100%. As to why the broker lets you take positions, is because as a broker the funds are kind of assured to come. There is no risk a broker has to take to allow the client to take positions. It would be ‘business unfriendly’ for them to not allow the client to take the position. Why does a client take position despite knowing that a penalty will be levied? If he thinks by taking the position he stands to make much more than the 1% penalty imposed, he would rather take the position, wouldn’t he?
Another point to note is that the concept of levying penalty for short margin has been enforced from 2010 onwards. So, brokers are used to letting clients take positions and a change of policy wouldn’t be favorable for their businesses.

But Venu do the traders actually know this. Cause such penalties are difficult to trace as its not available clearly on the site of SEBI / NSE.
So do the brokers actually send out any warning or alerts to clients when such a position is taken. Because I don’t think its easy for trader to figure this out on his own. Very few people apart from you would have known this?

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Its actually difficult on part of a trader to know all the rules pertaining in the markets. The broker may also emphasize on such points making it easier for the client to know.
Yes, some trading terminals do provide such alerts that the client may run a risk of being charged a penalty when he is utilizing encumbered funds. Geojit is one brokerage house that I know of who gives such alerts.

OMG, So I have to wait for tomorrow to buy some other option with the sale proceeding of today?

What if I transfer the sufficient amount as cash to my account and buy options immediately, will the broker report the recent cash pay-in?

Will I incur penalty in this case of cash pay-in?

I buy and sell options even on the same day or later any days and I am taking positions immediately by that sold amount. I have never seen such penalties so far… I am confused with your answer… what am i missing here to understand?

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Zerodha has charged me penalty charges of 1500 rs but I don’t see any reason for it, also along with margin there was free cash available all the time.
And how do they calculate this, since i had positive freecash with me all the time, is this fair also.

Does this penalty includes case of buying CE or PE? Because here we upfront pay the premium so it is technically not short reporting .

Hi @VenuMadhav

Looking forward to your answer to @simplebuthard here.

Also, in your explanation above, in the example, when the trader is buying fresh options using proceeds of sale on day 2 … The sale proceeds are available on T+1 (wednesday / Day3) but shouldnt the same be applicable to the second purchase transaction as well?

For the purchase transaction on day 2, shouldnt the funds be required in the account on T+1 only and not T (as per exchange rules)?

Thanks!

Hi @VenuMadhav and @nithin

Does a similar logic also apply in case of cash market transactions?

So, If a trader has 10k rupees in ledger on day 1. She buys 9k worth of shares on Day 1. She sells those on day 2 and soon buys 9k worth of shares of some other company on day 2 itself.

Will this result in any kind of funds shortfall?

Thanks!

this is very confusing
if one has fund one should be able to buy sell options any no of times
can anyone from zerodha clarify

What’s confusing here dear!
When you have to deposit money… you need to do it immediately.
When you are entitled to receive money…wait for 1 or 2 days.

For eg. You buy SBI shares or FnO - you need to pay for the cash/margin immediately, on the spot, at once. Money deducted from your account. Now wait for shares to be delivered on t+2.

Now you sell shares of SBI already in your demat. Now you must think that if the buyer is getting that shares from xchange only on t+2 then they will remain with me till then. NOOOO. You sell. The shares are immediately deducted from your demat.
Now both you the seller wait for your money & he the buyer wait for his shares …till t+2
But actually broker/xchange has deducted both the shares from you and the money from the buyer immediately.

For FnO/intraday wait for t+1

thx for reply,

AFAK,
In intraday - you have 5k. you buy opt of 3k and sell for 4k. So you realised profit of 1k. Zerodha shows that 1k as used margin for whole day. So you still got only earlier 5k to trade and not 6k. you again buy 3k of opt as CF. No penalty.

But yes, if you buy 6k - you over consumed your margin by 1k. hence penalty.

In this case, where you gave a scenario of Option trading, since the settlement is T+1 in derivatives, a shortfall is penalized for Tuesday Trade. Wouldn’t this affect liquidity from Retail Traders.

Well it would and its retarded and we all know it.

What kind of ridiculous logic is this? When there is MTM loss it is reported as shortfall. When there is MTM profit it again gets reported as shortfall by your explanation.

Suppose I have 175000 in my demat and I bought 1 lot of SBI at 315 today morning. Yesterday’s closing was 315 and margin required was 175000. Now price of sbi increased by 5 rupees at close so my MTM profit is 15000. Now new margin required is 178000 so on T day I am short by 3000 and you charge penalty of 0.5%. If price falls by 5 rupees i have MTM loss of 15000 and margin required is 172000. So I am short by 12000 and you charge penalty of 0.5%. In both cases penalty? What kind of logic is this and from whom? SEBI? Exchanges?

On top of this in case of MTM profit where you would report shortage of 3000 you would inform me of margin shortfall on next day and just charge undue penalty of Rs. 150.

@nithin @VenuMadhav

As per my understanding these charges are already accounted in contract notes as exchange transacion charge,… What is this charge then ??? never seen these kind of debits directally …pl explain