Hereโs a detailed explanation of how the key points from the SEBI circular will affect traders, with examples for each point:
1. ๐ฐ Upfront Collection of Option Premium (Effective February 1, 2025)
##Current Practice:
- Option buyers currently may only need to pay part of the premium upfront or may use margin funding for options trading.
##New Rule:
- From February 1, 2025, the entire option premium must be paid upfront when purchasing options. This rule eliminates the possibility of using excessive leverage for speculative trades.
## Impact on Traders:
- Example: If a trader buys 10 call options of Nifty at โน150 per option, the trader must now pay โน150 * 10 = โน1,500 upfront. Previously, they might have been able to use margin or pay part of the premium initially. This change will reduce speculative buying as traders need more capital on hand.
- Effect: Traders with smaller capital bases may see reduced ability to trade options due to higher capital requirements. It encourages more calculated decision-making and reduces risky speculative bets.
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2. โ๏ธ Removal of Calendar Spread Treatment on Expiry Day (Effective February 1, 2025)
## Current Practice:
- Traders benefit from calendar spreads, where they hold two positions across different expiries (e.g., buying a near-month contract and selling a far-month contract). This allows them to reduce margin requirements due to the hedged nature of the positions.
## New Rule:
- On expiry days, the benefit of offsetting positions (calendar spreads) will no longer apply. Both positions will be treated as individual, unhedged positions, increasing margin requirements.
## Impact on Traders:
- Example: A trader buys a Nifty option expiring in February and sells another expiring in March. Previously, the margin requirement would have been lower because of the spread. Now, on the expiry day of the February contract, both positions will be treated separately, and the margin requirements will be higher.
- Effect: Traders with calendar spreads will need to maintain higher margins on expiry days. This discourages holding such positions until the last moment and forces traders to square off positions earlier to avoid sudden margin calls.
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3. ๐ Intraday Monitoring of Position Limits (Effective April 1, 2025)
## Current Practice:
- Position limits are monitored, but the focus is often at the end of the trading day. Traders sometimes accumulate large positions intraday, only to reduce them before the close to stay within limits.
## New Rule:
- From April 1, 2025, exchanges will monitor position limits multiple times throughout the trading day (at least 4 snapshots).
## Impact on Traders:
- Example: If a trader takes a large intraday position hoping to reduce it before the market closes, they could now face immediate penalties or forced liquidation if their position exceeds the limit during one of the snapshot times.
- Effect: This will restrict large intraday positions that are temporarily over the limits. It promotes more consistent position sizing and reduces the potential for market manipulation.
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4. ๐ Revised Contract Sizes for Index Derivatives (Effective November 20, 2024)
## Current Practice:
- Currently, the contract size of index derivatives may be lower than โน15 lakhs (for example, in mid-cap indices or smaller indices).
## New Rule:
- Starting November 20, 2024, new derivative contracts must have a minimum value of โน15 lakhs.
## Impact on Traders:
- Example: Letโs say the current contract size of a particular index derivative is โน12 lakhs. Under the new rule, the exchange will adjust the lot size, increasing it until the contract value reaches โน15 lakhs. If a contractโs value per lot is โน3 lakhs, the new lot size will be increased to 5 units per contract instead of 4 units.
- Effect: Traders will need more capital to trade these contracts, reducing the number of smaller retail traders participating in derivative markets. It reduces excessive speculation but may also decrease liquidity in certain segments.
