On October 1, 2024, SEBI released a circular that changes a few things for index derivatives. Here’s a breakdown of all the changes and their impact.
Increase in contract size
Currently, the contract size for index F&O contracts is between Rs. 5 lakhs to 10 lakhs. Starting November 20, 2024, the contract value will be increased to between Rs. 15 lakhs to Rs. 20 lakhs.
This will increase the lot size for index F&O contracts and will also result in increased margin requirements in the same proportion. The increase in lot size could also result in existing positions in longer-dated options trading as odd lots. This will specifically impact longer-dated Nifty options, as the new lot size won’t be a simple multiple of the current one.
No calendar spread benefits on expiry day
Traders typically hold positions across different expiries (known as calendar spreads), this provides margin benefits and reduces the margin requirements.
On the expiry day of the F&O contracts, there’s a higher risk that the price of the contract expiring will behave very differently from contracts expiring at a later date. This is because of larger trading volumes on that particular day, which can lead to unpredictable price movements.
To manage this risk, SEBI has decided that traders will not get any margin benefits for calendar spreads on the day of expiry for contracts expiring on that day from February 1, 2025.
Example: Let’s say you have a short option expiring on 31st January with a margin of Rs. 1 lakh and a long option expiring on 28th February. Since your short position is hedged by the long one, you get a margin benefit and need only Rs. 50,000 instead of Rs. 1 lakh.
However, on 31st January (expiry day), this margin benefit will no longer be available, and you will have to maintain the full Rs. 1 lakh margin.
Limiting weekly expiry contracts
Currently, there are weekly expiries for 4 indices on NSE and 2 on BSE. Under the new rules, stock exchanges will only be allowed to offer weekly expiry contracts on one benchmark index. This comes into effect from November 20, 2024.
For example, NSE will be able to offer weekly expiry only for the Nifty 50 index or Bank Nifty, not for both. Likewise, BSE will be able to offer weekly expiry only for Sensex or BankEx. All other indices will only have monthly expiry.
Additional margins on expiry day
Starting November 20, 2024, an Extreme Loss Margin (ELM) of 2% will be applied to short positions (selling options) on the expiry day to cover potential risks due to increased volatility.
Example: You have a short position in Nifty 27,000 call option expiring on 30th October with a margin requirement of Rs. 1 lakhs. On the expiry day of this option, you will have to maintain an additional 2%.
ELM is calculated on contract value (Strike price * Lot size). So you will need an additional margin of Rs. 12,500 (25000 Strike price * 25 Lot size * 2% / 100) on expiry day.
Upfront collection of premium while buying options
To ensure there is no additional leverage provided, SEBI has mandated that an option buyer now needs to pay the entire option premium upfront.
Intraday monitoring of position limits
SEBI and exchanges have limits on the maximum positions a single client or a broker can hold for a particular contract. For clients, this limit is set at 5% of the total number of all derivative contracts of the same underlying and 15% for brokers.
Currently, these limits are monitored at the end of each day by the exchanges. Starting April 1, 2025, these will be monitored multiple times throughout the trading day.
Here’s when all the changes come into effect:
a full-time Trader with a collective experience of 8+ years in the Indian Stock Market With the insights I have gained over the past 8 years, I am here to take you on an intellectual and profitable journey, navigating the choppy waters of the Stock Market. With 5800+ Students already benefitting from My Structured Trading Secrets Classes, and turning an ROI of 20% to 50% every month.
0 Comments