The Securities and Exchange Board of India (Sebi) announced on Tuesday, 01-Oct-24 measures aimed at reducing undue speculation in FnO trading (mainly options) particularly from retail investors. They will be introduced in a phased manner beginning Wednesday, November 20, 2024.

Why did SEBI take these measures?

SEBI from time to time does research on various topics to find out what traders and investors are doing in the stock markets. You can find the list of all the research here. There are two research, results which prompted SEBI to take these measures. The links to the research are below:

Jan 25, 2023 – Study – Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment

Sep 23, 2024 – Study – Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24)

SEBI found out that over 91% of Futures & Option trades lost money trading in all the years in which the research was done. The data was taken from the top 10 brokers in India. Retail traders collectively made net losses amounting to a staggering Rs 1.81 trillion in F&O from March 2021 to March 2024.

SEBI wants to keep the retail traders away from Future and Options trading as much as possible so six measures were taken. These six measures aim to reduce undue speculation in FnO trading (mainly options) particularly from retail investors. The report is available here.

These six measures are:

1. Upfront collection of options premium:

Some brokers (not all as of Sep 2024) still do not collect the full premium for buying options for intraday trading only as of writing (Thursday, 03-Oct-2024). The margin they block is decided by the stop loss taken by the trader. Note that if there is no stop loss, then the full margin is blocked.

For example, today is the expiry day of weekly Nifty options. At 1.46 pm 3^rdOct 25300 CE (Call Option) has a premium of 19.5 and the lot size is 25.

Now assuming Amit trader thinks that Nifty will shoot up in the next 30-40 minutes and wants to buy this option to make quick money. He decides to buy 10 lots.

So the margin blocked should be 19.5 * 25 * 10 = 4,875.00

All brokers who block the full margin will block 4875.00. However, the brokers who give leverage on buying options in intraday trading will block only the maximum loss possible.

If the final trade is:

Buy 10 lots of 3^rd Oct 25300 CE and the stop loss is set at 15.5. then the max loss possible is

(19.50 – 15.50) * 25 * 10 = 1,000.00

Since options are highly liquid on the expiry day there is a 99% chance that if the price of the option drops – the stop loss will be executed.

Therefore the brokers who do not block the full margin will block only 1,000.00 for this trade. However, this will change if the stop loss is placed somewhere else.

Why do they do this?

To encourage their clients to trade more often. And this will help even a poor trader to trade options.

Well, the fact is they say this to advertise their product but in turn, it harms the trader but makes more money for the brokers.

However good thing is it will stop on Saturday, February 01, 2025.

How does it affect you?

Not much if your broker already blocks full margin to buy options intraday. However, if your broker blocked margin equal to the max loss, you have to trade less number of lots from Feb 25.

This is good news as 91% of option traders lose money trading options. Due to the leverage given they lose more, now if they still want to trade they will lose less.

Other measures are:

2. Contract size has now been increased to ₹15-20 lakh from 5-7 lakh currently for Index derivatives. The report does not mention anything about stock options. This is very confusing. Will write a detailed post if they only increase the contract size for Index options. The new contract size will take effect for all new contracts starting November 20, 2024.

3. No calendar spread benefit will be given on the expiry day starting February 1, 2025. I think they are talking about the margin benefit given on a spread.

A calendar spread is a strategy that involves simultaneously entering long and short positions on the same underlying asset, but with different delivery dates. This allows traders to offset risk between contracts and reduce margin requirements. However, on expiry days, the value of a contract expiring on the day can move very differently from the value of similar contracts expiring in future.

I feel this is done because, on the expiry day, the option premiums are just too volatile to offset the risk by buying an option expiring on a later date. Traders sell the options expiring the same day and to reduce the risk buy an option expiring in the next week or month. But the reality is the movement of the option expiring in a few hours is unpredictable and so volatile that a huge move will cause too much loss for the retail trader, which may not be compensated by the long option expiring next week/month. SEBI may have taken notice of this and have taken out the margin benefit given on calendar spreads.

This rule will reduce aggressive trading strategies, especially selling of options on the expiry days as full 15 lakh + 2% margin will be required to sell just one contact. The risk-reward ratio will be so pathetic that retail traders (especially those who used to short options on the expiry days) will now either become option buyers or will try some other strategy or may just stop trading (highly unlikely).

4. Intraday monitoring – 4 snapshots will be taken randomly and sent to the exchanges to monitor exchange set limits.

Purpose:
To prevent traders from exceeding permissible limits during volatile intraday sessions.
How it works:
The margin requirement for each snapshot is calculated, and the highest margin requirement is the peak margin.
When it will be effective:
The measure will be effective for equity index derivatives contracts from April 01, 2025.

This SEBI has done to ensure that even the small brokers who take benefit of no-monitoring to make money, follow the guidelines set by SEBI or lose their broking license. Now no broker can break the rule set by SEBI.

5. An additional 2% Extreme Loss Margin (ELM) on all open short options on expiry days will be required. This is done to reduce speculative trading on the expiry days.

• This rule will apply to options held at the start of the day and new positions created throughout the trading session.
• The rule is intended to protect against the high volatility that often occurs on expiry days.
• The rule will take effect on November 20, 2024.

6. Each exchange can have ONLY ONE weekly expiry contract from Nov 20, 2024. I think Nifty will keep The Nifty weekly expiry as it is the most popular weekly expiry. Bank Nifty, Nifty Finance and others will have only a monthly expiry.

Update on 18-Oct-24:

NSE is discontinuing weekly option contracts in the following indices:

Nifty Bank BANKNIFTY on November 13, 2024
Nifty Midcap Select MIDCPNIFTY on November 18, 2024
Nifty Financial Services FINNIFTY on November 19, 2024

No new weekly index option contracts will be generated with an expiry date beyond the last expiry date for the respective index as mentioned above.

NSE will continue to make weekly index options available only on the Nifty 50 Index (NIFTY).

Here is the NSE circular.

Nifty expiry will be Thursdays
Sensex expiry will be on Fridays.

Here is the Index options expiry schedule after November 20, 2024:

This new investment class is for HNIs only – i.e. people with a minimum of 10 lakh to invest.

I read a lot of websites but the whole picture is not clear.

I have understood that there will be certain rules for investing in derivatives, and it will fall between mutual funds and portfolio management services.

I fail to understand why this was necessary when there are thousands of mutual funds and many portfolio management services already available.

When the whole picture becomes clear I will write a detailed post. Till then if you have 10 lakh to invest I would request you not to invest in this new asset class now. It takes time to understand a new investment opportunity, how it works, what are the risks and rewards etc.

Invest only when you fully understand this or any other new asset class.

Here are a few features of this new investment class:

A. The minimum investment limit for these schemes will be ₹10 lakh per investor across all strategies.

B. This asset class will fall somewhere between mutual funds and PMS (Portfolio Management Services).

C. These will have adequate safeguards such as no leverage, and no investment in unlisted and unrated instruments beyond what is permissible for mutual funds. Exposure to derivatives is limited to 25% of AUM for purposes other than hedging and rebalancing.

D. These offerings will be referred to as ‘investment strategies’ to keep them separate from the traditional instruments of mutual funds.

Let us wait for the advertisements from the mutual funds, then we will understand this new investment scheme better.

I suggest just keep investing in good stocks, and mutual funds and trade derivatives with hedge to be safe. You can do my paid course to learn some good options and futures hedging strategies.

First: Budget 2024 in short for investors and traders:

Here are the key takeaways:

1) Higher Capital Gains Taxes

Long-term gains tax: 10% to 12.5%

Short-term gains tax: 15% to 20%

2) No Indexation Benefit – No indexation on investments, disappointing for investors.

What is indexation? Indexation adjusts the purchase price of an asset for inflation, reducing taxable profits and tax liabilities.

For example, you made a 30% profit in 3 years but the inflation for the last three years was at 5% every year. Then you pay taxes on 30 – (5+5+5) = 15% profit only, not 30%. But since this indexation benefit has been taken away, you will have to pay taxes of 30% even if you made this profit in 10 years.

3) Increased Tax Exemption

Capital gains tax exemption limit: ₹1 lakh to ₹1.25 lakh/year

4) Higher Securities Transaction Tax (STT)

Futures STT: Increased from 0.0125% to 0.02%

Options STT: Increased from 0.0625% to 0.1%

5) NPS Vatsalya for Minors

A new pension scheme allows contributions for minors, which become theirs upon adulthood.

How to Save Money From These Taxes?

Tax-Loss Harvesting. I did some research but could not find a correct solution. Then I used my expertise and found out an idea – here it is:

If you do not know tax-loss harvesting is a legal trick to save taxes on the short-term & long-term gains.

Let me explain with an example.

Step 1) Let us assume you bought two company shares – XYZ & ABC company shares both for 1 lakh. After six months XYZ company is giving at 30% profit and ABC company is giving a 40% loss.

Step 2) Now sell both. On paper, you have taken a 30,000 – 40,000 = -10,000/- short-term loss.

Step 3) The next day buy the ABC company shares (the one in which you took a 40k loss) for 60,000. Note that after selling ABC company shares you received 60,000 after taking a loss of 40,000. Use the same amount i.e. 60,000 to buy ABC company shares.

Step 4) DO NOT sell the ABC company shares for one year.

Thats it. Instead of paying Short-Term Capital Gains (STCG) Tax on 30,000, you can carry forward the 10,000 short-term loss for the next 8 years and adjust against any short-term gains in future to save taxes.

So you not only saved taxes but carried forward a 10k loss to be adjusted in future against any short-term gains.

You can carry forward your losses – both short and long-term for 8 assessment years immediately following the assessment year in which the loss was first computed.

Make sure to file these losses on your IT return so that when you book profits you can adjust these profits against the losses and either pay no tax or pay less tax on STCG  & LTCG.

You can do the same to save money on Long-Term Capital Gains tax. Here is an example:

Let us assume you have shares of two companies – ABC and XYZ company of 1 lakh each. After 1 year ABC is running at a loss of 20k and XYZ at a profit of 15k. You can sell both. Currently, you have an overall 5k loss. Now do not buy the shares of the company you booked profit in. Next day buy shares of ABC company in which you took the loss. Hold it till the next financial year. That’s it – instead of paying taxes on the profit you made you can file a carry forward loss of 5k and adjust against any gains made in the long term in ABC company or any other company shares for the next 8 years.

Is Tax Loss Harvesting possible in derivative trading?

No. Unfortunately, you cannot do this in derivative trading.

Actually, you can but closing a Future / Option and buying / selling it again will cost you huge Securities Transaction Tax (STT). See above. The cost of STT will be so high that it will offset the profits and increase the losses.

So tax loss harvesting is not recommended in derivatives trading unless you are an exceptional trader.

Securities Transaction Tax (STT) has almost been doubled and it just cannot be saved. It is charged on every trade you take. Unlike GST it doesn’t even have a credit input. It is a tax that you have to pay even if you have taken a Short Term or Long Term Capital Loss.

The only way out is to be a profitable trader. Losers in derivative trading will now lose more due to an increase in STT.

You can do my conservative options and futures course and learn hedged and stress-less strategies that will make small but consistent profits.

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