Navigating the New Landscape: Latest SEBI Rules and Regulations for Options Trading in India

 

Navigating the New Landscape: Latest SEBI Rules and Regulations for Options Trading in India

(March 2025)

The Indian stock market, particularly the derivatives segment, has witnessed explosive growth in recent years, driven largely by retail participation in Futures and Options (F&O) trading. However, this surge has also raised concerns about speculative excesses, market stability, and investor protection. To address these issues, the Securities and Exchange Board of India (SEBI) has introduced a series of regulatory changes in 2024 and 2025, reshaping the options trading framework. As of March 7, 2025, several of these rules are already in effect, while others are set to roll out in the coming months. In this blog, we’ll dive deep into these regulations, explore their implications with practical examples, and discuss how traders can adapt.

Background: Why the Changes?

Options trading in India, especially on indices like the Nifty 50 and Bank Nifty, has become a retail phenomenon. A SEBI study from 2024 revealed that over 90% of retail traders incurred losses in the equity F&O segment in the three years ending March 2024, with total net losses amounting to ₹1.81 trillion. This, coupled with a notional turnover of over $130 trillion in August 2024 (the highest globally), prompted SEBI to act. The goal? Enhance investor protection, curb speculative frenzy, and ensure market stability without stifling growth. 

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Let’s break down the key regulations, their effective dates, and what they mean for traders.

1. Rationalization of Weekly Index Derivatives (Effective: November 20, 2024)

What’s Changed?

SEBI has limited exchanges to offering only one weekly expiry contract per benchmark index. Previously, the National Stock Exchange (NSE) offered weekly expiries on Nifty, Bank Nifty, Midcap Nifty, and Finnifty, while the Bombay Stock Exchange (BSE) provided Sensex and Bankex weekly contracts. Now, each exchange must pick one index for weekly expiries (e.g., NSE chose Nifty, BSE chose Sensex), reducing the total number of weekly contracts from 18 to 6 per month.

Why?

Frequent expiries fueled speculative trading, particularly “zero-day-to-expiry” (0DTE) strategies, where traders bet on short-term price movements, amplifying volatility and risk.

Example

Imagine you’re a trader who used to scalp profits from Bank Nifty weekly options every Wednesday. Post-November 20, 2024, Bank Nifty weekly contracts are discontinued on NSE, leaving only monthly, quarterly, and half-yearly expiries. You’d now need to shift to Nifty weekly options (expiring Thursdays) or adjust to longer-term Bank Nifty contracts.

Impact

Retail Traders: Smaller traders chasing quick gains may exit or shift to monthly contracts, reducing trading volumes by an estimated 30–40% (per Zerodha’s projections).

Market Stability: Fewer expiries mean less volatility around expiry days, benefiting long-term investors.

2. Increased Contract Sizes (Effective: November 20, 2024)

What’s Changed?

The minimum contract value for index derivatives has jumped from ₹5–10 lakh to ₹15–20 lakh. For instance, the Nifty lot size increased from 25 to 50, pushing the contract value from roughly ₹5.5 lakh (at an index level of 22,000) to ₹11 lakh.

Why?

SEBI aims to raise the entry barrier, discouraging small retail traders with limited capital from speculative trading.

Example

Suppose you’re an option buyer with ₹2 lakh in capital. Previously, you could buy two Nifty call option lots (25 shares each) at ₹5.5 lakh total value, using leverage. Now, with the lot size doubled, one lot costs ₹11 lakh—far exceeding your capital. You’d either need more funds or sit out.

Impact

Retail Participation: Smaller traders (capital < ₹5 lakh) may find options trading unfeasible, pushing them toward cash equity or alternative markets like commodities.

Speculation: Higher costs reduce high-frequency, low-capital trades, aligning with SEBI’s goal.

3. Upfront Collection of Option Premiums (Effective: February 1, 2025)

What’s Changed?

Brokers must now collect the full option premium upfront from buyers before executing trades. Previously, some brokers allowed partial payments or deferred collections, increasing leverage risks.

Why?

To ensure traders have sufficient skin in the game and reduce over-leveraged positions.

Example

You want to buy a Nifty 24,000 call option expiring in March 2025, priced at ₹200 per share (lot size 50). The total premium is ₹10,000 (200 × 50). Pre-February 2025, a broker might let you pay ₹5,000 upfront and settle later. Now, you must pay the full ₹10,000 before the trade is placed.

Impact

Discipline: Forces traders to manage cash flow better, reducing reckless buying.

No Major Disruption: Most brokers already followed this practice, so the market impact is minimal.

4. Removal of Calendar Spread Benefits on Expiry Day (Effective: February 1, 2025)

What’s Changed?

Calendar spreads—where traders hold offsetting positions across different expiry dates—no longer receive margin benefits on expiry day. Previously, hedging a short option expiring today with a long option expiring next month reduced margin requirements.

Why?

To discourage speculative expiry-day strategies that exploit margin benefits.

Example

On January 30, 2025, you short a Nifty 24,000 call expiring that day (margin: ₹1 lakh) and buy a February 24,000 call as a hedge (reducing margin to ₹50,000). Post-February 1, 2025, on expiry day, you’d need the full ₹1 lakh margin, even with the hedge.

Impact

Strategy Shift: Traders relying on calendar spreads may pivot to outright positions or avoid expiry-day trades.

Cost Increase: Higher margins raise the cost of hedging, potentially reducing activity.

5. Additional Extreme Loss Margin (ELM) on Expiry Day (Effective: November 20, 2024)

What’s Changed?

An extra 2% Extreme Loss Margin (ELM) is levied on short index options on expiry day, on top of existing SPAN and exposure margins.

Why?

Expiry days see heightened volatility, and SEBI wants to protect against tail risks (extreme price swings).

Example

You sell a Nifty 24,000 put option (lot size 50) with a margin of ₹1.2 lakh (SPAN + exposure). On expiry day, an additional 2% ELM—say ₹24,000 (2% of ₹12 lakh contract value)—is added, raising your total margin to ₹1.44 lakh.

Impact

Option Sellers: Higher costs may deter aggressive shorting on expiry days.

Risk Management: Enhances broker and exchange resilience against sudden losses.

6. Intraday Monitoring of Position Limits (Effective: April 1, 2025)

What’s Changed?

Starting April 1, 2025, exchanges will monitor position limits for equity index derivatives intraday, four times a session, instead of just end-of-day checks. Proposed limits include ₹2,500 crore (gross) and ₹1,000 crore (net) for trading members.

Why?

To prevent breaches during high-volume expiry days and curb speculative buildups by Foreign Portfolio Investors (FPIs), High Net-Worth Individuals (HNIs), and proprietary desks.

Example

A proprietary desk holds ₹2,000 crore in Nifty futures and options by noon. Mid-session, they attempt to add ₹600 crore more, breaching the ₹2,500 crore gross limit. The exchange blocks this trade in real-time, unlike earlier when it’d only flag it at day-end.

Impact

Liquidity: Stricter limits may shrink volumes, as large players scale back.

Compliance: Brokers must invest in real-time monitoring systems, raising operational costs.

7. Delta-Based Open Interest Calculation (Proposed, Consultation Phase)

What’s Proposed?

SEBI plans to revamp Market-Wide Position Limits (MWPL) and F&O ban calculations using delta-adjusted open interest instead of notional values. Delta measures an option’s sensitivity to the underlying asset’s price change (e.g., a delta of 0.5 means a ₹1 move in Nifty shifts the option price by ₹0.50).

Why?

Notional values overestimate risk, often triggering unnecessary F&O bans. Delta-based calculations better reflect actual exposure, reducing ban frequency by up to 90% (per SEBI simulations).

Example

A stock’s MWPL is 50 crore shares. Traditional notional OI counts a deep out-of-the-money (OTM) option (delta 0.1) the same as an at-the-money (ATM) option (delta 0.5). With delta adjustment, the OTM option contributes less to OI, keeping the stock out of a ban longer.

Impact (If Implemented)

Trading Flexibility: Fewer bans mean more stocks remain tradable in F&O.

Retail Benefit: Easier access to derivative strategies without abrupt halts.

Implications for Traders

Retail Traders: Higher contract sizes and margins exclude small players, pushing them toward cash markets or speculative alternatives like crypto. Those staying must adopt disciplined, long-term strategies.

Option Sellers: Increased ELM and no calendar spread benefits raise costs, favoring buyers over sellers on expiry days.

Brokers: Enhanced compliance (intraday monitoring, upfront premiums) hikes operational expenses, potentially passed onto clients via fees.

Market Dynamics: Reduced speculation and volatility stabilize the market, but lower volumes may dent exchange revenues.

How to Adapt: Practical Tips

Upskill: Learn delta-neutral or hedged strategies to navigate higher costs and limits.

Capital Planning: Allocate ₹15–20 lakh per position or explore stock options with smaller lot sizes.

Timing: Avoid expiry-day trades unless fully funded; focus on monthly contracts.

Diversify: Consider commodities or forex if equity options become too restrictive.

Conclusion

SEBI’s 2024–2025 reforms signal a shift toward a safer, more stable options market in India. While retail traders face higher entry barriers, the changes aim to protect household finances and curb the gambling-like speculation that dominated F&O trading. As we approach April 1, 2025, and beyond, staying informed and adaptable will be key to thriving in this new regulatory landscape.

What’s your take? Are these rules a boon for market health or a hurdle for retail participation? Let’s discuss in the comments!

Disclaimer: This blog is for informational purposes only and not financial advice. Always consult a certified advisor before trading.