Index Options Contract Size Increased to 15-20 Lakh From 5-7 Lakh What To Do?

The Securities and Exchange Board of India (Sebi) announced on Tuesday, 01-Oct-24 measures aimed at reducing undue speculation in FnO trading (mainly options) particularly from retail investors. They will be introduced in a phased manner beginning Wednesday, November 20, 2024.

Why did SEBI take these measures?

SEBI from time to time does research on various topics to find out what traders and investors are doing in the stock markets. You can find the list of all the research here. There are two research, results which prompted SEBI to take these measures. The links to the research are below:

Jan 25, 2023 – Study – Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment

Sep 23, 2024 – Study – Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24)

SEBI found out that over 91% of Futures & Option trades lost money trading in all the years in which the research was done. The data was taken from the top 10 brokers in India. Retail traders collectively made net losses amounting to a staggering Rs 1.81 trillion in F&O from March 2021 to March 2024.

SEBI wants to keep the retail traders away from Future and Options trading as much as possible so six measures were taken. These six measures aim to reduce undue speculation in FnO trading (mainly options) particularly from retail investors. The report is available here.

These six measures are:

1. Upfront collection of options premium:

Some brokers (not all as of Sep 2024) still do not collect the full premium for buying options for intraday trading only as of writing (Thursday, 03-Oct-2024). The margin they block is decided by the stop loss taken by the trader. Note that if there is no stop loss, then the full margin is blocked.

For example, today is the expiry day of weekly Nifty options. At 1.46 pm 3^rdOct 25300 CE (Call Option) has a premium of 19.5 and the lot size is 25.

Now assuming Amit trader thinks that Nifty will shoot up in the next 30-40 minutes and wants to buy this option to make quick money. He decides to buy 10 lots.

So the margin blocked should be 19.5 * 25 * 10 = 4,875.00

All brokers who block the full margin will block 4875.00. However, the brokers who give leverage on buying options in intraday trading will block only the maximum loss possible.

If the final trade is:

Buy 10 lots of 3^rd Oct 25300 CE and the stop loss is set at 15.5. then the max loss possible is

(19.50 – 15.50) * 25 * 10 = 1,000.00

Since options are highly liquid on the expiry day there is a 99% chance that if the price of the option drops – the stop loss will be executed.

Therefore the brokers who do not block the full margin will block only 1,000.00 for this trade. However, this will change if the stop loss is placed somewhere else.

Why do they do this?

To encourage their clients to trade more often. And this will help even a poor trader to trade options.

Well, the fact is they say this to advertise their product but in turn, it harms the trader but makes more money for the brokers.

However good thing is it will stop on Saturday, February 01, 2025.

How does it affect you?

Not much if your broker already blocks full margin to buy options intraday. However, if your broker blocked margin equal to the max loss, you have to trade less number of lots from Feb 25.

This is good news as 91% of option traders lose money trading options. Due to the leverage given they lose more, now if they still want to trade they will lose less.

Other measures are:

2. Contract size has now been increased to ₹15-20 lakh from 5-7 lakh currently for Index derivatives. The report does not mention anything about stock options. This is very confusing. Will write a detailed post if they only increase the contract size for Index options. The new contract size will take effect for all new contracts starting November 20, 2024.

3. No calendar spread benefit will be given on the expiry day starting February 1, 2025. I think they are talking about the margin benefit given on a spread.

A calendar spread is a strategy that involves simultaneously entering long and short positions on the same underlying asset, but with different delivery dates. This allows traders to offset risk between contracts and reduce margin requirements. However, on expiry days, the value of a contract expiring on the day can move very differently from the value of similar contracts expiring in future.

I feel this is done because, on the expiry day, the option premiums are just too volatile to offset the risk by buying an option expiring on a later date. Traders sell the options expiring the same day and to reduce the risk buy an option expiring in the next week or month. But the reality is the movement of the option expiring in a few hours is unpredictable and so volatile that a huge move will cause too much loss for the retail trader, which may not be compensated by the long option expiring next week/month. SEBI may have taken notice of this and have taken out the margin benefit given on calendar spreads.

This rule will reduce aggressive trading strategies, especially selling of options on the expiry days as full 15 lakh + 2% margin will be required to sell just one contact. The risk-reward ratio will be so pathetic that retail traders (especially those who used to short options on the expiry days) will now either become option buyers or will try some other strategy or may just stop trading (highly unlikely).

4. Intraday monitoring – 4 snapshots will be taken randomly and sent to the exchanges to monitor exchange set limits.

Purpose:
To prevent traders from exceeding permissible limits during volatile intraday sessions.
How it works:
The margin requirement for each snapshot is calculated, and the highest margin requirement is the peak margin.
When it will be effective:
The measure will be effective for equity index derivatives contracts from April 01, 2025.

This SEBI has done to ensure that even the small brokers who take benefit of no-monitoring to make money, follow the guidelines set by SEBI or lose their broking license. Now no broker can break the rule set by SEBI.

5. An additional 2% Extreme Loss Margin (ELM) on all open short options on expiry days will be required. This is done to reduce speculative trading on the expiry days.

• This rule will apply to options held at the start of the day and new positions created throughout the trading session.
• The rule is intended to protect against the high volatility that often occurs on expiry days.
• The rule will take effect on November 20, 2024.

6. Each exchange can have ONLY ONE weekly expiry contract from Nov 20, 2024. I think Nifty will keep The Nifty weekly expiry as it is the most popular weekly expiry. Bank Nifty, Nifty Finance and others will have only a monthly expiry.

Update on 18-Oct-24:

NSE is discontinuing weekly option contracts in the following indices:

Nifty Bank BANKNIFTY on November 13, 2024
Nifty Midcap Select MIDCPNIFTY on November 18, 2024
Nifty Financial Services FINNIFTY on November 19, 2024

No new weekly index option contracts will be generated with an expiry date beyond the last expiry date for the respective index as mentioned above.

NSE will continue to make weekly index options available only on the Nifty 50 Index (NIFTY).

Here is the NSE circular.

Nifty expiry will be Thursdays
Sensex expiry will be on Fridays.

Here is the Index options expiry schedule after November 20, 2024: