The host of measures suggested by the market regulator SEBI to strengthen index derivatives has put traders in a bind.
SEBI is expected to announce the new norms soon, as the last date for public comments on the consultation paper was August 20.
SEBI’s consultation paper proposes measures including increasing contract sizes by up to four times, collecting options premium upfront, and reducing the number of weekly contracts.
When enacted, the proposals are expected to have far-reaching ramifications and may reduce the liquidity in the market. Traders, especially retail traders, fear their ability to trade and hedge their positions will become costly.
Raghav Malik, founder of Algo Test, an algorithm testing platform, said that under SEBI’s proposed regulations, the increase in contract size will disproportionately impact option sellers compared to option buyers.
For example, he said an option buyer of a Nifty 25000 weekly call currently pays Rs 2,200 as a premium while the seller sets aside Rs 73,000 in the margin. If the lot size triples, the buyer’s cost rises to Rs 6,600, while the seller’s margin requirement jumps to Rs 2.1 lakh.
Although the increase is the same percentage-wise, the absolute difference is far more significant for the seller, making the capital requirement much higher, he added.
Madhabi Puri Buch, chairperson of SEBI, said the regulator has received over 6,000 comments from the public on the consultation paper.
R Anand, CEO of Smart Money Advisors, said options are used not only by traders but also by informed retail investors, HNIs mutual funds, and other institutions to hedge cash market positions.
“Any new norms on F&O should ensure that the hedging cost does not go above the cost of carrying the cash market risk itself,” he added.
Internal market data provided by Algo Test shows that 45 percent of traders doing systematic trading—developing strategies after proper back-testing and forward testing—are profitable, said Malik.
The new SEBI regulation suggested by SEBI may push out the profitable traders (option sellers) and retain the losing traders (option buyers), he said.
Retail traders usually fall prey to fake narratives of finfluencer and usually buy options and eventually end up as losers,” Malik added.