purchased OTM puts were lying in my account near expiry. Broker couldn’t square off due to lack of buyers. The closing price of underlying was uncertain , so my ATM puts could become ITM at any time.
When i got call from RMS, i told them to square off , or do the needful to avoid delivery/settlement obligations. They suggested netting off by buying futures and i gave them full permission to do so. I don’t think the margin in my account was a problem , it was sufficient.
They placed orders to buy Futures but were rejected by system - “Kindly place order in next month due to physical settlement”. So basically the broker’s system is rejecting order of their own RMS staff.
I never thought purchased options could become a liability but here it did. Caused me a short delivery , auction and penalties. If it was possible, i would have sold those “puts” for a negative price.
Things could have been much worse.
The losses could have exceeded the margin in my account by 5x if i had multiple lots. And if the broker is taking margin in order to allow client to hold an expiry position, why can’t it use the margin to buy delivery of the underlying to save client from defaulting on delivery obligation ( short delivery ). The broker normally activates these RMS measures by 12 pm on expiry days. Why are they assuming there will still be liquidity at 12 pm and if not ,they simply pass the risk / losses to the client.
Also, why are options in india misnamed and misrepresented as “low risk” when they are actually a compulsion for the buyer and not an ‘option’. Don’t you feel this deserves a hearing in consumer forum , because technically you are the buyer of an insurance product , you have paid the premiums but actually end up having to pay the insurer instead.
Not ethical to defame a broker publicly. And apart from this , overall they have been really good. Support staff is very good. Brokerage is very low. The RMS team was also proactive and hardworking, just failed to prevent the tragedy.
Mental trauma was a lot more than the loss. Sleepless nights, extreme stress. Because there was uncertainty , infinite directional risk, and a high chance that loss could go above 3 lakhs also. Actual loss was somewhere b/w 25k to 40k. I was lucky that i just had 2 lots.
I’m very happy the incident happened. An eye opener for me. I will still continue my account with the broker, but i have lost faith in india’s regulatory authorities. I will dissuade all my acquaintances from doing F&O. And i will stop relying blindly on RMS staff to protect me.
If it was a more sophisticated broker like Zerodha , i think there’s a 70% chance situation could have been avoided. Zerodha’s RMS is much more efficient and experienced. But this entire episode was a rare occurrence i believe, a nightmare for any RMS. But yes, it has happened in past and will continue to happen. It’s an obvious flaw in the system that anyone can exploit for their own good.
How so? The settlement price would still be the theoretical price and will never be below 0. But the traded price can and should be below 0. Practically OP still has to bear the loss even if the option bought never went below 0. So how does the definition change? By implementing negative pricing, P/L remains almost the same but liquidity in CTM options dramatically increases providing exits to those who want it. Win win.
I understand the point. My guess is that SEBI looks at options mainly as a hedging instrument, and they may be concerned that negative pricing could be exploited by larger players in certain situations.
Personally, I feel the better solution would have been cash settlement instead of physical settlement. That would have avoided many of these expiry-related issues in the first place.
