According to a PTI report, the panelists will recommend short-term strategies to strengthen investor protection and improve the risk matrix in this market segment.
“The expert group will consider in detail the pros and cons of each of the seven proposals to protect small investors engaged in futures and options (F&O) trading. We know that nine out of ten small investors lose money in F&O. These recommendations will be taken to the Secondary Market Advisory Committee for a final decision. group will be considered by,” a source close to the development told PTI.
Options are financial contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within the contract period.
Quoting sources, the report said that the expert group is considering a proposal to rationalize or limit the weekly options. It is also considering rationalizing the strike price of the underlying assets and eliminating calendar spread benefits on the expiry date.
The other four proposals were upfront collection of option premiums from option buyers, intra-day monitoring of position limits, increase in lot size and increase in margin requirements near contract expiration.
Sources further said that the expert group will examine weekly options in detail as these are most attractive to retail investors who can participate with less capital.
“Retail investors tend to buy options cheaply in the hope of very high returns, and move away from ‘at the money’ options thereby losing the premium they paid,” explained a source.
‘At the money’ (ATM) describes the situation when the strike price of an option is equal to the current market price of the underlying asset.
The expert group will also consider options for increasing the lot size, sources said.
The lot size of index F&O was reduced by the National Stock Exchange after BSE relaunched its derivative products a year ago.
Both SEBI and the Reserve Bank of India (RBI) have raised concerns about the risks associated with the derivatives segment for retail investors.
Sebi chairperson Madhabi Puri Buch recently said the capital markets regulator has anecdotal evidence of people borrowing money to place speculative bets in the derivatives segment and lamented that household savings go into such risky bets.
The regulator also noted that option volume increases near the expiration of the weekly contract. Currently, there is at least one closing of NSE or BSE indices on all the five working days of the week.
SEBI data from FY2018 shows that overall derivative turnover at that time was Rs. 210 lakh crore and it increased in FY24 to Rs. 500 lakh crore, Buch said, with individual investors in index options growing from 2% in FY2018 to 41% in FY2024. .
The equity derivatives segment has seen increasing participation of retail investors in recent years, increasing by 42.8% from 65 lakh in 2022-23 to 95.7 lakh in 2023-24, the report said.
Trading volumes in the derivatives segment have seen exponential growth over the years in hypothetical terms, while trading volumes measured by premium turnover have seen a linear growth pattern, RBI’s bi-annual Financial Stability Report (FSR) said.
Commenting on the issue, Naresh Pachisia, senior vice-president of India Chamber of Commerce and MD of SKP Securities, told PTI that Sebi’s intention was in the right direction because when retail participation in options is unsecured, it turns from useful wealth creation to addictive speculation, which is Harmful to their financial health.
He also added, “However, at the same time, they need to ensure that long-term investors’ ability to hedge their portfolios using options is not affected. An effective investor education/awareness campaign can be useful.”
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