Maximum impact will be for retail option buyers: Algo trader on proposed increase in lot size of contracts

Maximum impact will be for retail option buyers: Algo trader on proposed increase in lot size of contracts

Retail trading communities on social media platforms were abuzz on July 9 after Moneycontrol first reported that an expert panel looking into the surge in the options trading in India has recommended a bevy of measures to the markets regulator.

The Working Committee on Futures and Options has sought restricting weekly options to only one expiry per stock exchange per week, sources told Moneycontrol.

The other key recommendation is to increase the lot size of options contracts from the present requirement of Rs 5 lakh to Rs 20-30 lakh, Moneycontrol reported.

Kirubakaran Rajendran, an algo trader who has over 60,000 followers on X platform (formerly Twitter), said the proposed measures will be a massive blow for the retail option buyers.

"If you buy 1 lot of ATM strike at Rs 250, then your max risk is 250*15= Rs 3,750. With the proposed change and new lot size, the max risk is 250*60(new lot size) = Rs 15,000.

"Earlier, if am trading with 4 lacs capital, I want to risk 1% of my capital in a trade, then I can buy 1 lot (15 QTY) at 250. Where if option price goes to zero, my max risk is Rs 3750 which is less than 1% of my capital. Now with revised lot size, Rs 15,000 (250*60) will be my risk per trade, if it should be equal to 1% risk on my capital, then my capital needs to be 15 lacs," he said.

He further said that risk management of the option buyers will go for a toss if the panel's recommendations are approved by SEBI.

8. Maximum impact is for the retail Option Buyers.

If you buy 1 lot of ATM strike at 250₹, then your max risk is 250*15= ₹3750.

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With the proposed change and new lot size, the max risk is 250*60(new lot size) = 15000₹.

Earlier if am trading with 4 lacs capital, I want to…

— Kirubakaran Rajendran (@kirubaakaran) July 9, 2024

"Person who is already trading with 15 lacs, no impact for him, as the quantity remains the same. He used to trade with 4 lots (60 quantity), now he will trade with 1 lot but still quantity remains the same. So his risk management is still intact. But anyone who use to trade with lesser capital, his risk management process can’t be applied now," added Rajendran.

He calculated that the lot size for Bank Nifty will be revised to 60 and Nifty will be revised to 125 so that that derivative contract value comes to around Rs 30 lakh.

Other proposals include fewer strike prices, upfront collection of option premiums from option buyers, intra-day monitoring of position limits, and further increasing margin requirements closer to expiry, a source told Moneycontrol.

The recommendations of this panel are to be considered by the Secondary Market Advisory Committee before a final decision is taken.

The rise in derivatives volume in India has been a cause for concern. The SEBI Chairperson recently said that the rise does not pose any systemic risk because of the robust margining system. But while derivatives trading is often scrutinized for its systemic risks, its severe social repercussions are equally concerning.

There is ample anecdotal evidence indicating that many individuals are borrowing money to trade options, hoping to make a quick profit. This when a SEBI study has found that almost 9 out of 10 retail traders lose money on options bets.

Market veterans have also pointed out that most weekly contracts serve no economic benefit as they are used solely for speculation and not what they are actually meant for — hedging.