In a move set to reshape the Indian derivatives market, the National Stock Exchange of India (NSE) has announced the discontinuation of weekly derivatives contracts on BANKNIFTY, MIDCPNIFTY, and FINNIFTY indices, effective from November 20, 2024. This decision, part of a broader framework by SEBI, is aimed at enhancing investor protection and market stability. With retail investors increasingly participating in options trading, regulators have stepped in to reduce risks, particularly around household finances.
Key Changes to Note
As per SEBI’s new guidelines, exchanges can only offer weekly expiry derivatives contracts on one benchmark index moving forward. For NSE, this will be the Nifty 50 index. As a result, weekly index options for BANKNIFTY, MIDCPNIFTY, and FINNIFTY will no longer be available after their respective last trading dates:
• Nifty Bank (BANKNIFTY): Last weekly expiry on November 13, 2024.
• Nifty Midcap Select (MIDCPNIFTY): Final expiry on November 18, 2024.
• Nifty Financial Services (FINNIFTY): Last expiry on November 19, 2024.
Following these dates, no new weekly contracts will be issued for these indices, leaving only monthly expiries available. The move aligns with SEBI’s broader goals of curbing excessive options trading and focusing on long-term stability.
BSE Follows Suit
Similarly, the Bombay Stock Exchange (BSE) will discontinue weekly derivative contracts linked to Bankex (BSEBANK) and Sensex 50, retaining only contracts linked with the benchmark BSE Sensex, its index of 30 blue-chip stocks.
SEBI’s New Measures: How They Impact Traders
Several measures outlined by SEBI, effective from November 20, 2024, will significantly impact how traders operate in the derivatives market. Here’s a breakdown of the key changes:
1. Increase in Lot Size
The lot size for index F&O contracts will increase, resulting in higher margin requirements. This will particularly affect retail traders, as they may find it harder to maintain positions due to the increased capital needed. Additionally, this change may lead to odd-lot positions in long-dated options, particularly for Nifty, where the new lot size may not be a simple multiple of the existing size. Traders will need to adapt, with a likely shift toward Nifty 50 weekly options. To simplify, the Nifty options contract which currently is a lot of 25 units will be increased to 60 units (rounded off). This will significantly impact the margins as small traders who would have risked a minimum of Rs 1500 (for an options contract of Rs 50 per unit) will now have to risk a minimum of Rs 3500, an exposure of nearly 50% more than what they had to risk before the implementation of the SEBI action plans.
2. Discontinuation of Weekly Expiries
With the removal of weekly expiries for BANKNIFTY, MIDCPNIFTY, and FINNIFTY, traders will face reduced short-term opportunities. Weekly options allowed traders to react quickly to market movements, but now they will need to adjust to monthly expiries, which provide less frequent trading windows.
3. Extreme Loss Margin (ELM)
To manage volatility risks on expiry day, SEBI will introduce an Extreme Loss Margin (ELM) of 2% for short positions. This will require traders to maintain additional margins for positions held until expiry. For example, if you hold a Nifty 27,000 call option with a lot size of 25, you'll need to provide an additional margin of Rs. 12,500 (27,000 * 25 * 2%) on expiry day to cover potential volatility risks.
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Impact on Traders and Investors
These changes will primarily affect traders who rely on weekly derivatives for their short-term trading strategies. The increase in lot size and discontinuation of weekly expiries may reduce trading flexibility and volatility in the market, particularly for smaller traders who will face higher margin requirements. The shift toward Nifty 50 options, which are more liquid and widely traded, may help absorb some of the impact, but the increased competition and volatility in this space could pose challenges.
For example, if you're a retail trader accustomed to frequent short-term trades in BANKNIFTY weekly options, you will now have to adjust your strategies, likely moving toward Nifty 50. However, with the higher lot sizes and added margin requirements, fewer small-scale trades will be viable.
Moving Towards a Safer and Stable Market
The discontinuation of weekly expiries for BANKNIFTY, MIDCPNIFTY, and FINNIFTY, along with the increase in lot sizes and introduction of Extreme Loss Margins, reflects SEBI’s commitment to market stability and investor protection. While traders may need to adapt to higher margins and fewer short-term strategies, these measures are aimed at creating a more resilient derivatives market.
As the changes come into effect on November 20, 2024, traders are encouraged to revisit their strategies, mark key expiry dates, and prepare for a shifting trading environment that places more emphasis on long-term stability. By doing so, they can better navigate the new trading landscape and continue to find opportunities in India’s evolving derivatives market.
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