To cover the tail risk in short option contracts, an additional extreme loss margin (ELM) of 2 per cent will be applicable on the expiry day starting November 20. This means the margin on expiry day contract goes up by 2 per cent.

Here is what experts have to say:

Ashish Nanda, President and Head of Digital Business at Kotak Securities, said, “The impact may be significant for hedgers. Customers may have to add some margin to their trading accounts, if they have short positions in Nifty 21 Nov expiry contracts and they haven’t left a buffer margin in their accounts. This will apply to Sensex on November 22 onwards. Say Nifty is currently at 24,000 and the lot size is 25. So the contract value becomes ₹6,00,000. So the current margin at 12 per cent should be around ₹72,000. This will increase by ₹12,000 and the new margin will be ₹84,000, which means a 16-17 per cent increase in margin.”

“While a 2 per cent increase in the margin may sound small, many are seeing massive shortfalls in their accounts. Why so? Because in the old regime, the margin requirement on ATM (at the money) strikes was around 12 per cent of the contract value. However, it used to drop as we go out of money to 11 per cent, 10 per cent, 8 per cent and so on,” he added. 

“For ATM strikes, margins will increase to ₹84,000 from ₹72,000 earlier but for say a 22,000 OTM strike margins will increase from ₹37,000 to ₹50,000, a 35 per cent increase. This means that more out of money you go, the increase will be even steep. Conversely, for ITM strikes, the increase will be less than 16-17 per cent we see on ATM strikes.” Nanda said.

Tejas Khoday, Co-founder & CEO, FYERS, said, “As a seemingly small change, the additional 2 per cent ELM on short index options contracts on expiry days has a much larger impact on market participants. For instance, a trader with a short position in a Nifty 23,500 put option, requiring ₹73,839 in margin, will now need an additional ₹11,750, making the total margin requirement ₹85,589. This is calculated on the contract value (23,500 strike price x 25 lot size is equal to ₹5,87,500), a 15 per cent hike in capital requirement. Such changes directly affect liquidity and capital efficiency, especially for those managing multiple short positions. While this measure bolsters market stability and encourages better risk management, we hope that frequent regulatory updates do not discourage traders from participating actively in the stock markets.”

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