Hella confused with option trading in US market

[Walker]

I am an Indian tax resident and I am looking to trade US stock options. However, there is no clarity on whether Indian residents are actually allowed to trade in US stock options. I spoke to one of the brokers that provides this facility, and this is what they stated regarding it.

also found an RBI notification, last updated in Feb 2019, which mentions that derivative undertakings are allowed:
https://m.rbi.org.in//Scripts/BS_FemaNotifications.aspx?Id=155#sch1

So, are Indian tax residents actually allowed to trade US stock options or not? And is there any official source or authority from which I can get a definitive answer on this matter?

[BB789]

@Walker

which mentions that derivative undertakings are allowed:
Reserve Bank of India - Foreign Exchange Management Act Notification

The ambiguity is probably on purpose.

One possible explanation is it is not permitted under LRS, but permitted outside of it nonetheless.

[Walker]

what do you mean by not permitted under LRS and permitted outside

[BB789]

Excerpts from AI:

The Foreign Exchange Management Act (FEMA) governs all foreign exchange transactions in India, while the Liberalised Remittance Scheme (LRS) is a specific provision under FEMA that allows residents to remit up to USD 250,000 per financial year for certain permissible transactions. Transactions outside the LRS may require prior approval from the Reserve Bank of India (RBI)
For transactions that exceed the LRS limit or are not covered under it, individuals must seek prior approval from the RBI. These may include

Direct investments in foreign businesses
Transfers for real estate purchases
Any other capital account transactions not permitted under LRS

[Walker]

As posted in the screenshot under LRS only cash account is allowed no margin account, and buying options doesn’t require any margin, so can it be interpreted that buying options is permitted…?

[BB789]

SLBM - next passive income stream for small investors?

@siva I see margin trading is banned as per RBI. But you can buy options without margin with full cash. So that shouldn’t be banned. Right?

SLBM - next passive income stream for small investors?

Options not allowed, atleast we won’t be offering, people interpret in many ways though.

• Master Direction - Liberalised Remittance Scheme (LRS) (Updated as on September 06, 2024) Master Directions - Reserve Bank of India

5. All other transactions which are otherwise not permissible under FEMA AND those in the nature of remittance for margins or margin calls to overseas exchanges/ overseas counterparty are not allowed under the Scheme.

Margin is not exactly defined in the LRS master direction. But somewhere in other directions it says the below. This may or may not be applicable definition:

• Foreign Exchange Management (Margin for Derivative Contracts) Regulations, 2020 Notifications - Reserve Bank of India

2. iv) “Margin” means the collateral that the parties to a derivative contract post with or collect from each other (whether directly or through a third party) to cover some or all of the credit risk that the provider of the collateral poses for the receiver of the collateral;

@Walker Which broke offered this though?

[Walker]

@BB789

Which broke offered this though?

TastyTrade

[Walker]

I asked Interactive Brokers they outright said that options not allowed for Indian users and still waiting for response from Charles Schwab

[Walker]

@BB789

2. iv) “Margin” means the collateral that the parties to a derivative contract post with or collect from each other (whether directly or through a third party) to cover some or all of the credit risk that the provider of the collateral poses for the receiver of the collateral;

if we go by this then options by definition doesn’t fit into this, options are right to buy number of stocks at a certain price at a certain date

[BB789]

@Walker

options by definition doesn’t fit into this

How so? Couldn’t option buying be interpreted as being “party to a derivative contract that you post collateral with”?

But would it definitely fit selling covered call? “All of credit risk” would imply so.

Again It’s probably ambiguous on purpose so that government can target anyone for other reasons.

[Walker]

@BB789

Again It’s probably ambiguous on purpose so that government can target anyone for other reasons.

yeah I agree…

[Walker]

@SLBM - next passive income stream for small investors?

I see margin trading is banned as per RBI. But you can buy options without margin with full cash. So that shouldn’t be banned. Right?

you asked this question in that thread last year so did you trade options in US markets with any broker…?

[BB789]

No. You need to emigrate to have such freedoms. Not making enough to have such options. Also RBI/Govt may even come down on LRS.

Global Investing

For now… yes. What happens when NIFTY hits 18k? SEBI/RBI:“Retailers need saving…They’ll lose money in foreign markets. We need to stop this…” Saviors of retail may put a stop to this. Zerodha might be too late. News reports government mulling LRS https://x.com/NDTVProfitIndia/status/2054830722767085908

[Walker]

Yeah they may very soon as US investing is getting very popular among retail traders nowadays

[Walker]

@BB789 I just a call from Charles Schwab and they are allowing both margin and cash account and unrestricted access to every tradable instrument for Indian tax resident

[BB789]

Makes sense. They don’t have a branch or business in India unlike IB. They don’t have to deal with RBI. But rules apply to residents anyway. The onus of compliance rests on you.

[LaSnak]

Technically it’s a FEMA LRS limitation so you could theoretically send the money for investment and then decide to do F&O. However, in practice Indian brokers for US investing don’t offer F&O so somewhat moot point