SEBI closes Weekly Options. New changes from Nov 20th

Learning Markets With Manish

1 Oct 202409:08

Summary

TLDRThe video explains recent changes in trading rules, focusing on option sellers and margin requirements. It discusses how brokers are adjusting to upfront premium collection, calendar spread treatment, and increased margin requirements, especially during expiry days. The main impact is on contract sizes, with Nifty and Bank Nifty lot sizes increasing significantly, which will affect smaller option sellers. Intraday monitoring of positions will also become stricter. The changes, effective from February and November, are expected to reduce volume and liquidity, particularly in weekly contracts.

Takeaways

📜 A new circular has been introduced after the board meeting did not bring any rule changes.
💼 Brokers are already collecting upfront premiums for option buyers, and there’s no significant change in this rule.
🔄 Calendar spread treatment will change on expiry day, and margin benefits for current expiry legs will be removed.
📈 Margin requirements for calendar spreads will increase, affecting returns for option sellers.
💡 Margin calculations for the last few days before expiry will be stricter, similar to commodity trading.
🗓️ Changes will be effective from February 1st, so traders have three months to adjust to the new rules.
🔍 Intraday monitoring will now involve four snapshots during the day, preventing limit breaches.
📊 Contract sizes will increase, especially for Nifty and Bank Nifty, affecting single-lot option sellers.
🔗 Weekly index derivative products will be limited to one benchmark index, and the rest will be monthly.
💰 Margin requirements for option sellers will increase, impacting liquidity and trading volumes.

Q & A

What is the primary change discussed in the circular regarding option premium collection?
-The circular reiterates that upfront collection of option premium from option buyers is mandatory. Most brokers already follow this rule, and it helps avoid slippage in option buying.
How will the treatment of calendar spreads on expiry day change according to the circular?
-The circular proposes to remove margin benefits for calendar spreads on the current expiry leg. Traders will no longer receive the margin benefit for such trades, impacting ROI for option sellers.
What changes will be made to margin requirements for options close to expiry?
-Margin requirements will increase in the last three days of expiry for both commodities and stock options. This aims to reduce risk in trades that are in-the-money as the expiry approaches.
When will the changes discussed in the circular be effective?
-The changes related to margin requirements for options and derivatives will be effective from February 1st. However, contract size adjustments will take effect by November 20th.
How will the increase in contract sizes affect option sellers?
-The lot size of contracts, such as Nifty and Bank Nifty, will increase significantly. Small option sellers who trade in single lots will face challenges, as they will now have to sell a larger quantity of contracts, increasing their margin requirements.
What is the impact of limiting weekly expiries to one contract per index?
-Each exchange will now only have one weekly expiry for its benchmark index, with the rest becoming monthly contracts. This may reduce liquidity in weekly contracts and increase margin requirements for sellers, as weekly contracts typically attract more liquidity than monthly ones.
What will be the effect of the new margin rules for intraday positions?
-Traders will now be monitored more frequently during the day, with four snapshots taken to ensure that no client breaches open interest (OI) limits. This change will primarily affect illiquid contracts, while liquid contracts like Nifty and Bank Nifty are unlikely to see much impact.
How will contract sizes for Nifty and Bank Nifty change under the new rules?
-Nifty's contract size will increase from 25 to 60-65, while Bank Nifty's lot size will grow from 15 to around 40-45. This adjustment ensures that the value of contracts stays within the 15 to 20 lakh range.
What will happen to option sellers’ margin requirements as a result of these changes?
-Option sellers will experience higher margin requirements, particularly during the last few days before expiry. Additionally, with the increased contract sizes, sellers will need to arrange for more margin to maintain their positions.
Why is the increase in contract sizes seen as both a problem and a solution?
-While the increase in contract sizes will pose challenges for small option sellers due to higher margin requirements, it is also seen as a necessary step to maintain liquidity and stability in the derivatives market by concentrating larger volumes into fewer contracts.

Outlines

00:00

📜 Overview of New Regulatory Circular

The speaker discusses a recently published circular with updates regarding trading rules. The circular, although not announced in the board meeting, introduces several changes. One key rule is the upfront collection of option premiums from buyers, a practice that many brokers already follow. Additionally, a minor change in margin requirements for calendar spreads, particularly on expiry days, is introduced. The current benefit of margin for hedging with expiring options will be removed, impacting returns for option sellers. The changes aim to avoid slippage and tighten margin maintenance, especially in liquid contracts.

05:00

📊 Impact on Calendar Spread and Margin Requirements

The speaker details the changes concerning calendar spreads, particularly focusing on the removal of margin benefits for expiring legs. This shift will increase margin requirements, leading to reduced ROI for option sellers. Further, margin calculations have been altered, with commodity markets already seeing margin hikes in the final days before expiry. These changes will take effect from February 1st, giving traders time to adjust. Intraday monitoring of positions will also become stricter, with exchanges taking snapshots of open interest four times a day to avoid breaches.

Mindmap

Keywords

💡Upfront Collection of Option Premium

This refers to the practice of collecting the premium from option buyers before executing a trade. The video explains that this rule is already followed by most brokers, ensuring that buyers have sufficient funds for their transactions. The intent is to protect investors and minimize slippage during buying, as brokers maintain margin requirements for the trade.

💡Calendar Spread Treatment on Expiry Day

A calendar spread involves buying and selling options with different expiration dates. The video discusses changes to margin benefits for calendar spreads, particularly near expiry, meaning traders won’t receive margin benefits if the current leg of the spread is expiring. This affects how traders handle positions with different expiry dates, especially with reduced return on investment (ROI) due to higher hedge costs.

💡Margin Requirements

Margins are the collateral that traders must maintain in their accounts to support trades. The video highlights an increase in margin requirements, particularly in the last few days before expiry in both options and stocks. This change is intended to secure trades, and traders will need to adjust their strategies, especially for high-leverage trades.

💡Contract Size

Contract size refers to the number of units of an asset in a derivative contract. The video details how contract sizes will be increased to meet a new minimum value of 15 to 20 lakhs. This affects traders, especially option sellers, who will need to trade larger quantities and meet higher margin requirements, impacting smaller sellers significantly.

💡Intraday Monitoring of Positions

This refers to tracking open positions during the trading day. The video explains that brokers will now have to take four snapshots during the day to ensure that traders do not exceed exchange limits on open interest. This change is likely to impact illiquid contracts more than highly traded ones like Nifty or Bank Nifty.

💡Weekly Index Derivatives

Weekly index derivatives are contracts that expire every week rather than monthly. The video explains that exchanges are now limited to offering weekly expiries for only one benchmark index, which will likely reduce liquidity in other derivatives and impact option sellers who rely on weekly expiries for their trades.

💡Option Sellers

Option sellers are traders who sell options to buyers, betting that the option will not be exercised. The video outlines how changes in margin requirements and contract sizes will negatively impact smaller option sellers, as they will now need to post more collateral to maintain their positions, especially during expiry week.

💡Hedge Costs

Hedge costs are the expenses involved in protecting a trading position from adverse price movements. The video describes how increased hedge costs due to higher margin requirements will reduce the ROI for traders using calendar spreads, making it more expensive to protect positions during volatile periods.

💡Open Interest

Open interest refers to the total number of outstanding contracts in a particular derivative. The video discusses how new rules aim to prevent traders from breaching open interest limits by implementing more frequent intraday checks. These rules are particularly relevant for illiquid contracts, where position monitoring was previously less strict.

💡Liquidity

Liquidity refers to how easily assets can be bought or sold without affecting the price. The video highlights concerns that reducing the number of weekly index derivatives and increasing contract sizes may reduce liquidity, especially in monthly contracts, making it harder for traders to execute large trades efficiently.

Highlights

The new rules were not introduced in the board meeting but a separate circular was released today.

Upfront collection of option premium from option buyers will now be strictly enforced, though most brokers already follow this rule.

Slippage in option buying might be reduced due to the enforcement of margin requirements.

Calendar spread margin benefits will no longer be available for the current expiry leg, increasing costs for some trades.

The last three days before expiry will now have increased margin requirements, similar to commodity derivatives.

A new proposal will come into effect from February 1st, giving investors three months to adjust to the changes.

Intraday monitoring of positions will be enforced with four snapshots taken throughout the day to avoid OI breaches.

Derivative contracts will now have a minimum value of 15 to 20 lakh rupees at the time of introduction.

Contract sizes for indices like Nifty and Bank Nifty will increase, impacting single lot option sellers.

Weekly index derivative products will now be limited to one benchmark index per exchange, with others moving to monthly expiries.

An additional 2% margin requirement will be applied for option selling contracts, increasing from 1 lakh to 1.12 lakh.

From April, intraday monitoring of position limits will also be enforced, impacting illiquid contracts.

Contract sizes will increase in the next 15 days, making it effective in mid-November.

Liquidity concentration will shift as most volume is currently in weekly expiries, but will now focus more on monthly contracts.

Small option sellers will face challenges due to increased lot sizes and higher margin requirements, while option buyers remain unaffected.