According to Kotak Securities, investor should aware of six changes that will be applicable from today on Index derivatives.

Interestingly, there is only one clause that goes live from today: “Increase in tail risk coverage on the day of options expiry,” said Ashish Nanda, President-Head Digital Business, Kotak Securities.

To curb the rise in speculative trading, SEBI had earlier announced major changes in trading in the F&O segment. One of the initiatives was increasing the lot sizes of index derivatives to a minimum of ₹15 lakh.

New lot size

As a result, the NSE and BSE have increased the lot sizes on index derivatives. 

The revised lot sizes are:

Nifty 50 : 25 to 75; Bank Nifty: 15 to 30; Nifty Midcap Select: 50 to 120; Nifty Financial Services: 25 to 65; Nifty Next: 50 - 10 to 25; BSE Sensex: 10 to 20; BSE Bankex: 15 to 30; BSE Sensex 50: 25 to 60.

Impact of balance 5 clauses will be seen progressively from December 1, 2024, to April 30, 2025, said Nanda.

Increase in tail risk coverage on the day of options expiry will mean that from today extreme loss margin (ELM) Margin for all Index Derivative contracts expiring on the same day will increase by an additional 2 percentage points, he said. ELM has increased from 2 per cent to 4 per cent. 

“Overall Margin increased from broadly 11 per cent to 13 per cent 

“Since we have Nifty weekly expiry today, 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 behind the expiry day for Sensex and so on and so forth,” he said.

 How it works

Margin on expiry day contract goes up by 2 per cent. Say, Nifty is currently at 24,000 and lot size is 25. So the contract value becomes ₹6,00,000. So current margin at 12 per cent should be around Ra 72,000. This will increase by 12,000 being 2 per cent. So new margin will be ₹84,000. Which means a 16-17 per cent increase in margin. 

(These are broad numbers used to help you understand this better. Exact may be a bit lower/higher)

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

“So, in case of ATM strikes, it may look like ₹72K margin going to ₹84K, which is 16-17 per cent increase, but for say a 22K OTM strike margin will increase from 37K to 50K, being a 35 per cent increase. 

Which means that, the more out of money you go, the increase will be even steep,” according to his analysis.

“Conversely, for ITM strikes, the increase will be less than 16-17 per cent we see on ATM strikes,” he further elaborated.

In short, ELM increase of 2 per cent applies direct on contract value, he said adding that No hedge benefit. “It may be significant for hedgers. This in my opinion has the capacity to move the needle. Rationalisation begins,” he further said.

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