SEBI changes the F&O Game

The boring stuff: Options to be paid upfront Option premiums have to be paid by options buyers. Sounds obvious, but currently, intraday, the exchanges just block the broker's collateral for options bought, which therefore allows one person to effectively buy and sell intraday using another person's collateral. This must be a few brokers that provided this facility to allow mad intraday options buy positions. From Feb 2025, this won't happen - clients will have to pay up from their money for such purchases.

No Calendar spread on expiry day: You can sell an option on expiry day and buy a futures or options for a later expiry (like sell weeklies, keep a monthly buy on a different strike or so)

This provides a "calendar spread" benefit that reduces margins by as much as 50%. This lower margin allows a person with X lakh rupees in margin to take 2 times the position as he would without the calendar spread benefit. And SEBI doesn't like it. So they've removed the spread benefit only for expiry day (if one leg of any spread is expiring that very day only)

This is not a bad idea, as there was a large amount of retail scalping happening on daily options expiries, especially selling straddles. There is systemic risk in case the offsetting calendar option doesn't move anywhere close to the expiring one (can happen in case of sudden spikes) - which makes sense on expiry day because max trading happens there.

I had demonstrated the calendar spread impact here: https://x.com/deepakshenoy/status/1818275122580467941

Intraday monitoring of position limits: At a broker level you have be less than some percentage of all OI etc. This was monitored end of day.

But obviously mad trading happens on expiry day for options and the OI will expand considerably due to massive participation, but all of it intraday.

To therefore ensure that one broker doesn't breach the limits, SEBI says exchanges have to monitor the limits intraday (4 times a day)

This means that if a broker hits limits, you can't do fresh trades and can only close existing ones until the broker level OI is less than the limits allowed.

Good, for systemic risk. Impact wise I don't know how bad this is, but if SEBI had a full note on it, it must be serious.

Lot size upped to 15 lakh: Lot sizes used to be, say, 5-10 lakh. For the Nifty it's about 6.5 lakh right now (25 x 26000). This is from an old thingy in 2015 when it was bumped up from 2 lakh to 5 lakh.

Now we'll see it go to between 15 and 20 lakh (so for Nifty it may be 75 or so, at 26000) after November 20, 2024. Only for index derivatives (stocks will still be between 5-10 lakh)

This is good. Higher lot sizes are just a function of the GDP growing. In the US, the median contract size in the top 100 is about $17000, which is about 14 lakh rupees.

Only one weekly expiry per exchange: Too much drama having expiries every day alternating between exchanges. So now each exchange chooses an index for a weekly expiry and has only one of them per week. So from Nov 20, 2024, only two weekly expiries will be there, from the current five.

While I don't think the volumes will reduce (people will just move to the weekly that they can instead) but it's better than having the madness daily. And with the other calspread removal, upfronting of options premium etc. the volumes should subside a little at the extreme retail end.

Higher expiry day margins: Short options will see 2% higher Extreme Loss Margins on expiry day. This will just ensure that the short-straddle kind of plays on expiry day become more expensive.

Short straddles, even those with stop losses, have an extreme risk. Enough people play those, and when stops hit (nifty moves sharply in one direction) the price of the option can go bonkers - we have seen a Rs. 2 option hit Rs. 800 in the past, which might be higher than the margin placed on the short option trade!

So a higher ELM will provide some buffer, even if 2% is hardly enough.

Full circular: https://www.sebi.gov.in/legal/circulars/oct-2024/measures-to-strengthen-equity-index-derivatives-framework-for-increased-investor-protection-and-market-stability_87208.html