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.