Zerodha co-founder Nithin Kamath believes the suggested changes in Sebi's consultation paper on F&O, even with the Securities Transaction Tax (STT) increase, won’t really change options volumes. However, he points out a likely decline in futures trading volumes due to these changes.
"From what I’ve seen at Zerodha, futures traders have higher odds of making money than option buyers. On a gross basis, futures traders are profitable about 50% of the time as opposed to options traders, who are only profitable about 10% of the time. This is because options come with almost unlimited leverage, whereas leverage on futures is capped at 6 times (15% for index)," Kamath wrote in post on X.
He suggests that if the goal is to reduce speculation, introducing a product suitability framework to deter non-serious traders might be more effective.
Sebi's proposals, released in a consultation paper, aim to enhance investor protection and market stability amidst rising retail participation and speculative trading volumes in index derivatives. Sebi suggests that members should collect option premiums upfront from clients, aligning this practice with the existing requirement for margin collection on futures positions.
Additionally, the minimum contract size for index derivatives is set to increase in two phases. Initially, the interval will be raised to Rs 15-20 lakh, with a further increase to Rs 20-30 lakh after six months. This change reflects the significant rise in benchmark indices since the last revision in 2015 and aims to reverse the sachetization of high-risk products.
To address the evolving market structure, Sebi proposes that position limits for index derivatives should be monitored intraday by clearing corporations and stock exchanges. To mitigate high leverage risks in options contracts nearing expiry, Sebi proposes increasing margins on expiry day and the preceding day. This measure aims to curb the high notional risk associated with near-expiry options trading.
Sebi also suggests that weekly options contracts should be limited to a single benchmark index per exchange to enhance market stability and investor protection. The regulator notes that the daily expiry of options across different indices creates significant risks due to hyperactivity around expiry. In addition, the introduction methodology for strike prices may be streamlined, with uniform intervals near the prevailing index price and wider intervals for strikes further from the current price. This proposal aims to maintain a manageable number of strikes and ensure consistent implementation across stock exchanges.