General Trading Chat
- Thread starter timepass
- Start date
- Tags idle thoughts trading talk only
Copied from Facebook .... Sharing here ...
Traders must read !!
Mumbai-based Chirag Gupta felt on the top of the world after trading hours on January 25 -the expiry day of the month's futures and options contracts. The 27-year-old trader had made a stupendous 5,300% gross returns betting on Nifty through options. But the celebrations were short-lived after he received the contract note from his broker. The statement showed that Gupta owed the broker `18 lakh, which was 15,900% more than the money he had put in to initiate the trade.
The huge liability was no clerical error at the broker's back office; it was on account of the Securities Transaction Tax (STT) that he had to pay for allowing the Nifty options positions to expire, a rule that has the potential to trigger a systemic crisis. STT is a levy that investors and traders pay soon after they trade on the stock exchanges. In the case of options trading, the STT is around 0.05% on the premium. The STT on exercising an option is 0.125%.This is where the problem lies.When an option is exercised, the STT is paid on the entire value of the option. This is where Gupta had to face huge losses.
On the expiry day of the January contracts, Gupta bought 3,000 lots of 8,600 calls in the last few minutes of trading. One Nifty lot is currently 75 units. The premium he paid was five paise per lot, which cost him ` 11,250 (3000*75*0.05). Gupta's bet was that the Nifty would close above 8,600 based on the weighted average pricing estimates. In case his wager went awry , his losses would have been capped at `11,250 -the total premium paid. The Nifty closed at 8602.75 that day that re sulted in him making `6.18 lakh (3000*75*2.75). The gross profit in this trade was about `6.07 lakh.But Gupta inadvertently made a mistake; he did not square off the position during trading hours.Instead he allowed it to expire, unaware of the enormous tax implications.
Since he allowed the Nifty options to be exercised, he had to pay STT on the full value of the options, which was almost `24.20 lakh ((8602.75*3000*75)*0.125%).If Gupta had sold the options before closing, the STT would have been 0.05% only on the premium.As he made roughly `6.18 lakh from the trade, his total liability was reduced to `18 lakh. What was supposed to be a profitable trade for Gupta ended up being a loss-making one.
Gupta might just be one of the many retail traders who had to pay the price for not understanding the tax rules before trading in options. In several cases, it has never come out in the open because retail traders usually buy smaller lots. In Gupta's case, he bought a bigger quantity , thereby amplifying the hit he took.One could blame him for the lack of knowledge of the tax rules but the bigger issue that authorities need to take note is the repercussions of such blundered trades on the system.
Hypothetically, if this happened to a trader, who built bigger positions in options and was unable to square off the trades before expiry, his broker would be wiped out. Brokers claim they send regular reminders to clients asking them to square off profitable positions in options on the expiry day but most of them go unnoticed.
Temporarily , this problem could be solved by allowing options trading in the post-market session between 3:40 PM and 4:00 PM.Currently , this is allowed only for shares. Brokers, after scanning their logs for such positions, could square them off in this window.Else, the government could step in to tweak the tax rules.
Traders must read !!
Mumbai-based Chirag Gupta felt on the top of the world after trading hours on January 25 -the expiry day of the month's futures and options contracts. The 27-year-old trader had made a stupendous 5,300% gross returns betting on Nifty through options. But the celebrations were short-lived after he received the contract note from his broker. The statement showed that Gupta owed the broker `18 lakh, which was 15,900% more than the money he had put in to initiate the trade.
The huge liability was no clerical error at the broker's back office; it was on account of the Securities Transaction Tax (STT) that he had to pay for allowing the Nifty options positions to expire, a rule that has the potential to trigger a systemic crisis. STT is a levy that investors and traders pay soon after they trade on the stock exchanges. In the case of options trading, the STT is around 0.05% on the premium. The STT on exercising an option is 0.125%.This is where the problem lies.When an option is exercised, the STT is paid on the entire value of the option. This is where Gupta had to face huge losses.
On the expiry day of the January contracts, Gupta bought 3,000 lots of 8,600 calls in the last few minutes of trading. One Nifty lot is currently 75 units. The premium he paid was five paise per lot, which cost him ` 11,250 (3000*75*0.05). Gupta's bet was that the Nifty would close above 8,600 based on the weighted average pricing estimates. In case his wager went awry , his losses would have been capped at `11,250 -the total premium paid. The Nifty closed at 8602.75 that day that re sulted in him making `6.18 lakh (3000*75*2.75). The gross profit in this trade was about `6.07 lakh.But Gupta inadvertently made a mistake; he did not square off the position during trading hours.Instead he allowed it to expire, unaware of the enormous tax implications.
Since he allowed the Nifty options to be exercised, he had to pay STT on the full value of the options, which was almost `24.20 lakh ((8602.75*3000*75)*0.125%).If Gupta had sold the options before closing, the STT would have been 0.05% only on the premium.As he made roughly `6.18 lakh from the trade, his total liability was reduced to `18 lakh. What was supposed to be a profitable trade for Gupta ended up being a loss-making one.
Gupta might just be one of the many retail traders who had to pay the price for not understanding the tax rules before trading in options. In several cases, it has never come out in the open because retail traders usually buy smaller lots. In Gupta's case, he bought a bigger quantity , thereby amplifying the hit he took.One could blame him for the lack of knowledge of the tax rules but the bigger issue that authorities need to take note is the repercussions of such blundered trades on the system.
Hypothetically, if this happened to a trader, who built bigger positions in options and was unable to square off the trades before expiry, his broker would be wiped out. Brokers claim they send regular reminders to clients asking them to square off profitable positions in options on the expiry day but most of them go unnoticed.
Temporarily , this problem could be solved by allowing options trading in the post-market session between 3:40 PM and 4:00 PM.Currently , this is allowed only for shares. Brokers, after scanning their logs for such positions, could square them off in this window.Else, the government could step in to tweak the tax rules.
\Yeah i heard about that and even he wrote a petition to finance ministry. Strong advice to every one of us is to never ever let your contracts to get exercised. try to close it by yourself because STT will eat your profits and even make you to pay more like mentioned above if you let your contracts exercised. If you are new to options area then try trading in 1 or 2 lots and try exercising and closing the contract by yourself. We can earn the profit at anytime. But we have to have capital with us to do that. Without knowing what is going on with the contracts closing styles, we might lose capital as well. This is a lesson for all of us. If you are against this STT, please support him in the below link. What happened to him , might happen to any one of us at any time. You never know.
https://www.change.org/p/security-t...-markets?source_location=petitions_share_skip
https://www.change.org/p/security-t...-markets?source_location=petitions_share_skip
Important Note
I came to know that there is going to be Revision in Transaction Charges of BSE Equity Segment and Introduction of Clearing Charges in Equity Cash Segment w.e.f. 03rd April 2017
This is another stupid move.If someone buys 1000qty and placed single order and all gets executed in single order then he has to pay Rs1.
And if someone places 1000qty in single order but order gets executed like 100qty and in 10 trades then he has to pay 10rs as Rs 1 /trade executed.
I dont understand this concept , all these orders are getting executed electronically without manual interventions, Why do they need to charge Rs 1/order.
I came to know that there is going to be Revision in Transaction Charges of BSE Equity Segment and Introduction of Clearing Charges in Equity Cash Segment w.e.f. 03rd April 2017
This is another stupid move.If someone buys 1000qty and placed single order and all gets executed in single order then he has to pay Rs1.
And if someone places 1000qty in single order but order gets executed like 100qty and in 10 trades then he has to pay 10rs as Rs 1 /trade executed.
I dont understand this concept , all these orders are getting executed electronically without manual interventions, Why do they need to charge Rs 1/order.
Similar threads
-
My Views on the General Elections 2024
- Started by Verde
- Replies: 21
-
-
What are some general and basic price-volume action pattern one should know?
- Started by shyttrader
- Replies: 1
-
-