In a bid to protect small investors from risks in futures and options (F&O) trading, the Securities and Exchange Board of India (SEBI) has set up an expert group to discuss seven key proposals. These proposals aim to address regulatory issues and improve safety for investors in index and stock options trading.
Short-Term Strategies for Investor Protection
According to a PTI report, the expert group is considering short-term strategies to better protect investors and manage risks in this market segment. The group will closely examine the advantages and disadvantages of each proposal to help small investors, who often lose money in F&O trading. The Secondary Market Advisory Committee will review the group’s recommendations for a final decision.
Understanding Options Trading
Options are financial contracts that allow holders to buy or sell an asset at a specific price within a certain period, but without the obligation to do so.
One proposal under discussion is to limit or adjust weekly options. The group is also looking at rationalizing strike prices and removing calendar spread benefits on expiry days. Other proposals include upfront collection of option premiums, intra-day monitoring of position limits, increasing lot sizes, and raising margin requirements as contracts near expiry.
Focus on Weekly Options
Sources say the group will pay special attention to weekly options, which attract retail investors with low capital. Many retail investors buy options cheaply, hoping for high returns, but often end up losing the premium they paid because they choose options far from ‘At the Money’ (ATM). ATM options have strike prices equal to the current market price of the underlying asset.
Increasing Lot Sizes
The expert group will also consider increasing lot sizes. The National Stock Exchange had previously reduced lot sizes for index F&O after the Bombay Stock Exchange re-launched its derivative products.
Both SEBI and the Reserve Bank of India (RBI) are concerned about the risks retail investors face in the derivatives segment. SEBI chairperson Madhabi Puri Buch recently highlighted that people are borrowing money to make speculative bets in derivatives, risking their household savings.
SEBI data shows a significant increase in derivative turnover, from Rs 210 lakh crore in FY2018 to Rs 500 lakh crore in FY2024. The participation of individual investors in index options has also surged from 2% in FY2018 to 41% in FY2024.
Retail participation in the equity derivatives segment has grown rapidly, with the number of retail investors rising by 42.8% from 65 lakh in 2022-23 to 95.7 lakh in 2023-24.
Support for SEBI’s Efforts
Bharat Chamber of Commerce senior vice president Naresh Pachisia supports SEBI’s efforts, emphasizing the need to protect retail investors from harmful speculative practices. However, he also notes the importance of not hindering long-term investors’ ability to hedge their portfolios using options. An effective investor education campaign could be beneficial, he adds.
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