How not to make Rs 38 lakh in options trading

The basics of options trading include buying calls, selling puts, strike price and hedging

When I was in Singapore a few months before, the local investors association had organised a workshop on options trading. A broker-cum-trainer explained the basics of options trading such as buying calls, selling puts, strike price and hedging. He explained how option traders can make steady, almost “risk-free” income by taking “calculated risks” for individuals. These market evangelists have the knack of turning you into a believer in a couple of hours.

With the whole world — from the finance minister to corporate leaders and pink paper analysts — conspiring to further bring down the meagre interest income my meagre savings sitting in bank accounts are earning, the greedy part of my mind started suggesting, “Buy the call, sell the put and pocket the difference. What are you waiting for?”

Adding fuel, over the past few weeks ‘options trading’ has popped up in conversations with people who one could least relate it with. One was a banker friend in Chennai, who told me about his colleague who made a return of five per cent per month from options trading. He even offered my friend a profit sharing formula to help him out in the initial stages. “You take positions on both sides. Bet higher on the side you think the Nifty will move and a smaller one on the opposite as stop-loss. Simple,” my friend was told. He's still deciding.

Then, I heard the story of an MBA graduate, who had a corporate job with a neat salary, refusing to go back to work as he claimed he had learnt the trick of making money from home. “I make more in options,” he is said to have told bewildered people at home. That’s 2-0 in favour of my plunge into the hunky dory world of options.

The real scary story of the options mania that seems to have gripped the country amid the largely one-way movement the market has seen over the past year came from a railway stationmaster in Karnataka. In September, Vijayendra Rao received texts from a Surat-based company, offering to help him make handsome profits through options trading. He was offered a 70:30 deal, wherein he would get to keep the bulk of the profits; the advisory company would keep the rest.

Lured by the big money promised and pushed by his own difficult financial position, Rao bit the bait.

While the advisory asked for a minimum investment of Rs 1 lakh, Rao said he was a ‘small investor’ and requested for a relaxation.

He was first asked to pay a service charge of Rs 15,000 to ‘make profits.’ In two further instalments, he paid Rs 40,000 more. By the end of October, he was informed he had made Rs 7 lakh of profits in the trading and was asked to remit the service tax amount of 12.33 per cent. That’s when Rao realised the con. Subsequent phone calls threw up conflicting responses, with the last being that his profits had swelled to Rs 38 lakh and he had to remit the corresponding tax amount. Rao wants his capital back.

His options today range between knocking the doors of a multitude of enforcement agencies which are already loaded with several unsolved multi-crore scams to a wild-goose chase across the country.

With fear now firmly taking over my mind from greed, my only option seems to be to pray that Governor Rajan doesn’t succumb to the convoluted theories floated by cut-mongers and stays put on rates.