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 are aimed at reducing undue speculation in FnO trading (mainly options) particularly from retail investors.

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. Only for Index derivatives they have written. Again this is confusing. If you know more please inform me.

3. No calendar spread benefit on the expiry day. I think they are talking about the margin benefit given on a spread. Let us wait for more information.

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

5. Additional 2% margin on all expiry days. This is done to reduce speculative trading on the expiry days.

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