With SEBI's introduction of reduced intraday leverages from Dec 1, I am assuming the volumes will go down. Range contraction might also happen because of reduction in intraday margins. It is bound to happen and we might see some strong and jerky moves all of a sudden. But it needs to be seen.
What do you guys think?
It's going to be a phased implementation so the effects will be seen over a period of time. Leverage in Intraday equities will only be marginally impacted from tomorrow as up to 20x leverage will be available in BO/CO depending on the stocks until the next phase starting 1st Feb onwards.
I think most impacts will be felt after March because F&O volumes will start getting squeezed little by little. Margins will eventually rise and that will impact volumes I think.
Equity & Futures trading volumes will definitely be hit. Options trading is likely to increase. Buying ITM & Deep ITM options offer a substitute for futures trading as they have a good amount of intrinsic value. The margin requirements in options and the inherent risk management benefits are better. Also, there is no other choice so..
But the margins for writing options will also consequently increase no?
Yes, this is a tricky situation!
The margins for MIS options writing would go up steeply and in fact, would creep towards the NRML margins. This is bound to reduce the sell-side volume to a certain extent.
This is a 2 sided sword. Options would be priced higher & the option buyer will pay more for the option with the option falling steeply closer to expiry, esp if it is ATM or OTM.
It actually makes sense to arrange for the margin somehow and become a seller. :-)
For OTM options that expire worthless, the option writer is going to make much more money than he is making as of now. :-)
True. It has become a very uncertain environment. Instead of progressing, we are regressing. The biggest fear is that this is going to dry up liquidity and create room for sudden knee jerk moves in the markets.
Exactly! Also, any strategy which you have backtested won't work in this new environment and we will need to wait for some time to be able to backtest new strategies till the data builds up in this new environment.
Absolutely! A friend too brought it to my notice. We have to work upwards from a zero base. All the logics that held good will have come to naught.
The majority of the close to the expiry day intraday options sellers will be out of commission. For them, ROI was greater because of leverage. To be able to put up exchange prescribed initial margins and make lower returns may not be exciting enough.
Days of super normal returns of twitter gurus are probably over. Grounded again!
SEBI has changed the margin scenario several times in the past (margins went up nearly 100% in 3 years time and then there was introduction of margin benefit for hedged positions). I have observed that in none of these situations was there any change in the way options get priced. Unlike other commodities, options do not get governed by the classic economic principles of supply vs demand. Options are only priced according to the 5 greeks (Black Scholes) and my 2 cents is, demand-supply does not play a role. Maybe some short term disruption for a few days at the max.
Yes, maybe you are right. Eventually, we will get there, though, the margins are going up significantly this time, and the disruption could be quite a bit, throughout this transitionary phase. Also, as this liquidity situation is going to change gradually, it could help minimize disruption.
We are talking about industry wide positions getting squeezed out due to low margins. If liquidity dries up as a result of increased margins, the option sellers also do not enter the picture properly, no?
I would be a very happy person if this is just a short term disruption, since I've just made the transition into becoming a full-time trader. But I am afraid that is not the case.
I do not think so @alphacentauri. As @Kapil Marwaha has mentioned there could be some disruptions in the transitionary phase that's all. It is going to reduce the volumes no doubt and impact the people who have been depending on mad 50x-60x leverage for strategies (I also partly fall in this list :)). However option market in India will continue to operate with good no. of sellers and buyers. It is one of the most traded and liquid markets in the world. This margin rule is not the end of the world. Let's hope that the disruptions are very short term in nature.
I hope so too Karthik. I am an intraday and swing trade with a puny capital. My biggest worry for now is the issue of liquidity. Let us see how things pan out. I hope to be optimistic :)
I think it will be a smart move this time SEBI is doing good job, soon expecting Micro, Mini futures introduction to Indian market, so even retailers will trade with care & very important is all equity futures will be made into fixed lot size but no naked trading will be allowed, Options will have great liquidity in all contracts,
Weekly Option Expiry for equity will be introduced for sure so make sure large holdings & health growth in Indian market 21000 Targeted for nifty in next 2 years
All Bears will turn to bulls but use quarterly contract & options as hedge so safe guard annual returns for there Portfolio, most import manipulation will be avoided 99% after Margin reducing to 1.33X.
New Indian market is going to emerge keep this post for long time reference.
@Traders Craft Tech SEBI's ideology is to protect retail traders by limiting/restricting small retail traders' access to derivatives trading by raising the bar. Allowing exchanges to launch micro, mini futures that got banned years ago is quite unlikely and counterproductive to their agenda.
Can't say much about weekly expiries in Stock F&O and other developments. NSE will definitely do a few things to compensate for lost revenues by trying to promote other products & instruments. We'll see what happens.
This new rule is definitely going to create huge disruptions in the current market environment. Just imagine if you are asked to put up 100% margin to sell options and Trade in futures. I am expecting a colossal volume drop in exchanges once the 4th phase is fully implemented. This will certainly affect traders at all strata irrespective of their capital. The small traders will be definitely out of the markets. But the returns of the big money traders and HNI option sellers will shrink drastically. Brokers lose business and brokerage towards the trades. Traders and investors lose liquidity and slippages will be huge. This decision of Sebi is for sure not in the best interest of any market participant. Totally sad to see the once exuberant market getting completely dry up. The worst part is no broker is raising their voice against this half-baked margin rules.
Yeah, everyone's expecting volumes to go down and it will affect option shorters & futures traders the most. I guess retail trading will shift to options (Buying). Btw, the brokers associations have given feedback and expressed concerns about this but at the end of the day, we as a brokerage must follow the rules as prescribed by the regulator & exchanges.
March 1st, 2021
Phase 2 of the peak margining system starts today. Will be highly interesting to see how this affects retail trading. One thing for sure, volumes will keep drying up little by little it appears.
@alphacentauri I think this is something we need to wait and watch, also keeping in mind where there is money to be made through speculation the liquidity never dries out.