What it takes to and how to trade US options from India
Interested in trading options in the U.S. market from India? Options are powerful but complex financial instruments, and while they offer great opportunities, they also come with significant risks. In this guide, we’ll explore whether it’s possible for Indian residents to trade U.S. options and how to go about it legally and effectively.

What are options and who can trade them
Options are derivative contracts that give the holder the right, but not the obligation, to either buy or sell an underlying asset like a stock, ETF, or commodity at a predetermined price known as the strike price on or before a specific date (the expiration date). For this right, the buyer pays a non-refundable amount called a premium to the seller/writer of the option.

Can Indian residents trade options in US market from India?
The short answer is no primarily due to restrictions under India’s Liberalized Remittance Scheme (LRS). While the LRS allows Indian residents to remit up to $250,000 per financial year abroad for certain purposes such as foreign travel, education, medical treatment, or investing in stocks it does not permit remittances for trading in derivatives or margin products like U.S. options.

Why this restriction exists
The main reason for this restriction is investor protection. Trading in derivatives especially options can lead to significant financial losses, particularly for inexperienced traders. According to a report by Securities and Exchange Board of India (SEBI), about 90% of retail investors in derivatives lose money, while only 5% break even and another 5% make profits. To minimize such risks, SEBI has restricted access to these products for Indian residents trading on foreign exchanges.

Despite the restrictions, you can manoeuvre your way and legally trade options in US market if you live in India.

How to trade options in us stock market from india?
Use cash account
Since the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) regulations do not allow spreads or margin trading which involves derivatives contracts including options and futures you can use cash account with regulated US brokers. These brokers allow level one approval which means no margin or selling cap-strategy is allowed, but buying calls/puts is permitted.

Remember, Indian regulations (SEBI + RBI) are more tolerant of international investment when derivatives exposure is fully funded, reducing systemic risk hence the reason for you to use a cash account. Also, U.S. brokers reduce legal and credit risk by not extending margin accounts to non-residents without strong regulatory infrastructure.

With that said, how do you go about trading options in us market if you live in India using a cash account? Here is a step-by-step instruction:

Consult with financial, legal, and tax experts
Before taking any action, engage professionals who understand both Indian and US regulations. These will include:

Financial advisor – To assess your risk tolerance, investment goals, and determine if options trading is suitable for you. They can also advise on compliant ways to invest internationally.

Legal counsel (forex expert) – To get a definitive interpretation of RBI’s LRS rules concerning your specific intention to trade US options, including the permissibility of using purpose code S0020 for individual residents’ speculative derivative trading.

Tax professional –To understand the intricate tax implications in both the US and India, and to ensure full compliance.
Choose and open an eligible brokerage account
Select an international broker that explicitly allows Indian residents to open accounts and offers access to US options trading. Look for well-regulated brokers like Interactive Brokers (IBKR), Tasty trade, Charles Schwab, or others known for global access.

Account type – As we have mentioned above, open a cash account specifically capable of US options trading. This is crucial as margin trading or short options writing (without proper collateral) by Indian residents is generally prohibited or highly restricted under Indian regulations.

Options approval – Request Level 1 Options Approval (buy-only options allowed). This usually permits buying calls and puts, and potentially basic spreads like bull/bear call/put spreads. Avoid strategies that involve unlimited risk or margin requirements, which are typically disallowed.

Documentation – Prepare necessary documents like copyright, PAN Card, Aadhaar Card, proof of address, bank statements, and Form W-8BEN (to claim Double Tax Avoidance Agreement (DTAA) benefits and reduce US withholding tax for non-US persons).

Fund your account
This is the most critical and contentious step due to LRS regulations.

LRS remittance – If using funds from India via LRS, you will need to remit up to the USD 250,000 annual limit. You will then choose a purpose code i.e S0020 on the RBI List of Purpose Codes – Outward Remittance, which notes ‘Payments made on account of margin payments, premium payment and settlement amount etc. under Financial derivative transactions.’

Caveat on S0020 – While code S0020 exists, be extremely cautious and ensure your bank explicitly approves the remittance for options trading by an individual resident. Many Indian banks might refuse or seek extensive declarations due to the overarching RBI prohibition on speculative derivatives under LRS. If your bank or legal advisor cannot definitively confirm its permissibility for your specific scenario, do NOT proceed with LRS funds for this purpose.

Alternative (If applicable) best trading platforms – If you have funds legitimately earned outside India and held in a US bank account e.g., from prior employment in the US, or returns from compliant overseas investments, transferring these to your US brokerage account might be a less complicated route from an LRS perspective, though Indian tax reporting requirements still apply.
Understand and execute approved options strategies
Once your account is funded and approved, educate yourself thoroughly on options.

Approved strategies – Focus on buy-only options (buying calls and puts). You may also be able to utilize basic defined-risk strategies like bull call spreads, bear put spreads, or covered calls (where you own the underlying stock).
Prohibited activities – Strictly avoid margin trading or writing (selling) options short without being covered as these are generally against Indian foreign exchange regulations for resident individuals and carry unlimited risk. Ensure your broker settings prevent such trades.
Education – Learn about option Greeks (Delta, Gamma, Theta, Vega), implied volatility, and how to read an options chain. Start with a demo account if available.
Track profit and loss, taxes, and LRS compliance
Ongoing record-keeping and compliance are essential.

Profit & Loss (P&L) tracking
Maintain detailed records of every trade, including execution best trading platforms prices, commissions, and expiration dates.

Tax compliance
Work closely with a Chartered Accountant (CA) or tax professional experienced in international taxation.

US taxes – Understand any withholding taxes on dividends (if you hold underlying stocks) or if any capital gains become taxable in the US (less common for non-US residents unless they meet specific criteria). You will need Form W-8BEN to declare your non-US status.

Indian taxes – Report all foreign income and assets in your Indian Income Tax Return (ITR) under Schedule FA (Foreign Assets) and Schedule FSI (Foreign Source Income). Capital gains from options best trading platforms will be taxed as short-term or long-term capital gains in India, depending on the holding period.
Double Taxation Avoidance Agreement (DTAA) – If any tax is paid in the US, your CA can help you claim credit for it.
LRS compliance – lastly, keep detailed records of all remittances made under LRS and ensure you remain within the annual USD 250,000 limit. Document the purpose code used and any declarations made to your bank.

Conclusion

Understanding how to trade options in the US market from India requires more than just opening a brokerage account, it demands strict regulatory compliance, careful planning, and risk awareness. While it is possible through approved cash accounts and proper remittance procedures, the process is complex and not suited for casual or uninformed investors. Always seek expert advice and follow SEBI, RBI, LRS and other relevant regulations and guidelines to stay on the right side of the law.