 "Sebi F&O proposals seen further boosting appeal of options segment")
The proposed hike in index derivatives contract size by the Securities and Exchange Board of India (Sebi) to the derivatives framework is seen as boosting the appeal of the already popular — and highly risky — options segment.
The regulator has proposed that the minimum value of the derivatives contract at the time of introduction should be between Rs 15 lakh and Rs 20 lakh. It should be further increased to between Rs 20 lakh and Rs 30 lakh after six months, Sebi has said in a consultation paper. Currently, the minimum value of a derivatives contract is around Rs 5 lakh.
The higher contract size is aimed at increasing the entry barrier for small investors.
The entry barrier for the futures segment is already high compared to options — where trades can take positions for even less than Rs 500. As a result, the options segment is gaining more popularity.
Currently, index options have a 29 per cent share in the overall futures and options (F&O) turnover. This share has increased from just 5 per cent in 2019-20 (FY20). Meanwhile, the share of index futures now stands at 15 per cent, down from 29 per cent in FY20.
Sebi’s proposals come a week after the government proposed to hike the securities transaction tax (STT) on the sale of options to 0.1 per cent from 0.0625 per cent and on the sale of futures in securities to 0.02 per cent from 0.0125 per cent starting October 1.
Experts say these changes will further increase the appeal of options trading.
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“Whether it is an STT increase in the Budget or contract size going up to Rs 20 lakh, these changes will incentivise futures traders to move to options,” wrote Nithin Kamath, founder and chief executive officer (CEO) of Zerodha, the country’s most profitable brokerage, on X.
“From what I’ve seen at Zerodha, futures traders have higher odds of making money than options buyers. On a gross basis, futures traders are profitable about 50 per cent of the time as opposed to options traders, who are only profitable about 10 per cent of the time. This is because options come with almost unlimited leverage, whereas leverage on futures is capped at six times (15 per cent for index),” he wrote.
Sebi has also proposed significant tightening on the options side. This includes the upfront collection of option premiums from buyers to reduce leverage. Moreover, contracts based on fewer strike prices will reduce the number of deep-out-of-the-money contracts — which are cheaper and entice small investors.
Deepak Shenoy, founder and CEO of Capitalmind, said many individuals could be punting on low-cost options for a big move on expiry day, while sellers are just looking to eat the premiums.
For the uninitiated, equity trading is broadly divided into two segments — cash and derivatives. While cash trading is largely straightforward, derivatives trading has two main parts: F&O. Both F&O contracts are available on individual stocks and indices.
In 2023-24, the cash market segment clocked a turnover of Rs 217 trillion. The total derivatives segment turnover on a premium basis was 2.2x at Rs 482 trillion. However, derivatives turnover on the often-quoted notional basis was 368x cash at Rs 79,927 trillion.
Notional turnover is calculated by multiplying the strike price of each contract, while premium turnover is the sum of premiums paid on all contracts.
To illustrate, assume a trader bought 100 Nifty 25,000 calls at Rs 100. Premium turnover would be 100 x 100 = Rs 10,000, whereas notional turnover would be 100 x (25,000 + 100) = Rs 25.1 lakh.
To brag about huge volumes, exchanges disclose turnover on a notional basis. However, premium turnover is a more accurate measure, and the calculation of STT and other taxes is done on the premium paid.