When most of the world was reminiscing the bittersweet moments of 2021 and anticipating the arrival of 2022, Dinesh M, a Chennai-based stock trader, was wondering how he would be able to pay a penalty of ₹12 lakh because of SEBI’s new rules for options.

For Dinesh M, the New Year started off with him making a YouTube video begging for crowdfunding through a story that demonstrates how vulnerable retail traders suddenly are in the Indian stock market.

Dr. Sanjay, another victim of the same rule, saw ₹35 lakh being wiped out from his account because of a price difference of 35 paise.

Shweta, who started trading to overcome depression, experienced another level of stress induced due to misfiring option trade in the backdrop of SEBI’s new rules that she was never informed about.

There are countless stories of retail traders dealing in options who are facing financial crisis, emotional blow, and havoc in their family life due to new rules introduced by Securities and Exchange Board of India (SEBI) on October 16 that came to a head with respect to a Hindalco options trade on the December 30 expiry.

As per new rules, introduced from November expiry, if Spot price of a stock closes below a Strike price (means In The Money for Put holders), then a trader holding Put options of that stock either needs to square off the positions before expiry or provide the shares. New rules meant option has to be settled by delivery. Thus, anyone holding In The Money (ITM) option will receive/give delivery of shares depending on whether one is holding Call or Put options.

For the uninitiated, Put option means the trader is expecting price to go down from Spot price while Call option means a trader is expecting the stock price to move up from Spot price (current price). As per theory, buying option has a limited liability where a trader's loss is restricted to the premium paid while selling option has unlimited liability. But due to the new rules, even a buyer of option has to bear unlimited liability in case she could not square off positions before expiry and option becomes an ITM.

Fortune India spoke with over a dozen traders who lost a big fortune and are trading through different broking Firms like Zerodha, ICICI Direct, Profitmart, and Upstox. None of them were aware about changes in rules where delivery of shares for ITM trades is made mandatory. Not a single retail trader was informed by their broker about the change in SEBI’s rules, nor were they given any warning before they came to face the liability that they now find hard to handle.

All these traders were holding 450 Strike price Put option for Hindalco and they could not square off their positions at the time of expiry due to sudden disappearance of buyers from Hindalco option counter. On December 30 (expiry day), Hindalco Spot Price closed at ₹449.65.

Interestingly, Hindalco was trading in the range of ₹451 to ₹453 for most of the day. But after 2:30 PM, it went down to ₹448. Inexplicably, at the same time buyers of Put options vanished from Hindalco counter trapping all the 450 Put holders as their Put got converted into ITM.

“I never thought that a mere difference of 35 paise will bring a loss of ₹35 lakh to my account,” said Pune-based Dr. Sanjay. "How could a retail trader know such rule change where limited liability of option buying has been converted into unlimited risk?"

The Hindalco incident is a case in point, where it seems that the new option rules may create systemic risk in future as retail traders are defaulting in droves as they are neither aware about these rules nor able to fathom for whose benefits these rules are introduced. To top it all, there seems to be no provision of not penalising a trader in an event where square off is not possible due to lack of liquidity in the system!

Dr. Sanjay also lamented about receiving no support from his broker, Profitmart. He told Fortune India that the broker deducted about ₹35 lakh from his account, and up until the time Fortune spoke with him, on January 8, 2022, he has not received any contract note or any information regarding his Hindalco option Trade. His broker, Profitmart, also squared off his positions in gold and nickel without informing him at the same time.

"If they could square-off my positions in gold and nickel without informing me, why could they not do it with my Hindalco Put option?" Dr. Sanjay wondered.

Chennai-based engineer and trader Dinesh M who made a YouTube video narrating his plight said he is in no position to repay the ₹12 lakh loss to his broker, ICICI Direct, as he already has a ₹15 lakh loan liability. He paid a premium of ₹17,000 for 42 lots of Hindalco 450 Put. He is still wondering how his ₹17,000 liability turned into ₹12 lakh loss as he has not received his contract note from ICICI Direct.

“My trading account has been frozen and my salary account is with ICICI Bank, so I am not sure whether my future months’ salary would be coming to me,” Dinesh M said. He took out a heavy loan in 2020 as his baby was born prematurely, and now he is again saddled with trading losses that are beyond his means to repay. “After putting up my plight on Twitter and YouTube, I got a crowd funding of ₹1.4 lakh till the evening of January 9,” he said. Dinesh M also complained that even after many follow-ups, the ICICI Direct staff is clueless, and now he has given up on further follow-ups.

“What could we have done when there was not a single buyer available for us to square off our trade? How does this rule even make sense when we are supposed to sell to square off our positions but we are not able to sell because there are no buyers available?” asked Dinesh M.

Anand Solanki, a Kolhapur-based sub broker of Profitmart brokerage house, says this was a black swan event for which neither brokers nor traders were prepared.

“We never thought even in our wildest dreams that option buyers would disappear from a Nifty50 stock like Hindalco and at the same time stock price would be pushed below 450 after 2:30 PM, trapping all the retail traders,” he said.

Anand was holding 117 lots of Hindalco for which he paid ₹2.64 lakh as premium. He could not square off a single lot due to mysterious disappearance of Put buyers and is now holding a baggage of liability worth ₹42 lakh.

“In the last three years, Profitmart earned over ₹30 lakh as brokerage from me and my 300 clients, but now in my hard times they have shifted all blame on me ignoring that they never explained to us the consequences of SEBI’s new rule,” he said.

Anand told Fortune India that his mother is paralytic and his father is a senior citizen with blood pressure problem and none of them are in a situation to help him out. “I too am suffering from high BP and due to the poor health of my parents I am not able to share my agony with my family members as I fear that this shocking story might make their condition even worse,” he said.

Anand Mehta, a Pune-based HR employee who suffered a loss of ₹1.07 lakh on two lots says, “Rules are supposed to protect small guys like me, not to destroy them.”

Mehta paid a premium of ₹3,500 and thought his maximum loss would be restricted to the premium loss but he got the shock of his life when he got calls from officials of Zerodha, his broker, to pay ₹1.07 lakh for the trade. Anand has a burden of a personal loan worth ₹6.5 lakh. He claimed that he is unable to pay out the loss as his salary along with earning from a small grocery shop that his father owns, is not sufficient to meet the huge financial burden he has.

“If somebody commits suicide due to the mental trauma caused by this impasse, who should be held responsible?” he asked. The new option rules are lopsided to favour big operators against retail traders, he pointed out.

Shweta, a lawyer-turned-trader, informed that though her broker Profitmart deducted ₹2.75 lakh from her account, she had not received any contract note regarding this up until the time Fortune India spoke with her. She was holding 8 lots and paid a premium of around ₹17,000.

“I learned trading to overcome depression after I lost my mother, but I never thought trading would bring a new kind of mental stress for me,” Shweta said.

Shweta was handling indirect tax litigations for a company, but took a job break for two years due to her mother’s cancer. “When I tried to re-enter the job market, tax laws got changed due to the introduction of GST. Instead of learning new GST rules, I preferred to learn trading as it allowed me to stay at home and take care of my family, while earning something for myself,” she said.

Ankur, a public servant from Agra, incurred a loss of approximately ₹76,000 on two lots that he bought for around ₹4,000.

“I was teaching my wife how to trade when I entered into this trade as technical charts and other technical indicators were favourable for Put buying,” he said.

The debacle taught him that neither fundamental nor technical analysis is sufficient for Indian retail traders to earn money in a distorted market where rules are made for welfare of large operators, he complained.

Amit Bhatia, a Mumbai-based professional who suffered a loss of ₹68,000 on two lots that he bought for ₹3,000 said if new option rules continue then systemic risks in Indian markets will be inevitable. “Every month you will see the same trick being played in different scrips and retail will be stuck in such counters,” he quipped.

Hemant, a Gurgaon-based software professional, suffered a loss of approximately ₹1.8 lakh on five lots for which he paid a premium of approximately ₹12,000. “I started trading to have a second stream of earning but I never thought it will hurt me dearly,” he said. Indian regulator and exchanges are changing the rules without creating awareness among market participants, he added.

Dr. Sanjay, who lost ₹35 lakh in the fiasco, has not only lost his confidence in the theoretical fundamentals of trading, but also the entire stock market. He states that only the retail investor seems to be bearing losses while his broker goes scot-free despite lack of transparency and inadequate risk management. Expressing his frustration about the illogical rule that SEBI has introduced, he wonders whether there is any justice possible for the retail traders who were ensnared mercilessly on Hindalco option Trade on December 30.

He commented, “My confidence is thrashed as we are working in a broken system, and I am still wondering where regulators were when this mischief was played on us?”

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