Sebi specialist team will review 7 suggestions for immediate actions to control F&O frenzy

According to sources, an expert group appointed by Sebi has initiated discussions on seven proposals aimed at addressing regulatory issues and protecting small investors from risks in index and stock option trading. The panel members are expected to recommend temporary measures to improve investor protection and enhance risk metrics in this market segment.

The experts will thoroughly evaluate the pros and cons of all seven proposals for safeguarding small investors in futures and options (F&O) trading. A source familiar with the matter stated that nine out of ten small investors do not profit in F&O, and the decision of the Secondary Market Advisory Committee will take into consideration the recommendations of this group.

Options are contracts involving money that grant the holder the right to buy or sell an underlying asset at a predetermined price during a specific period. According to sources, the proposals include consolidating or limiting weekly options, consolidating strike prices of the underlying assets, and removing calendar spread benefits on the expiry day.

The remaining four suggestions included collecting option premiums in advance, monitoring position limits during the day, raising lot sizes, and increasing margin requirements close to contract expiration.

Both Sebi and RBI have shown worry about the dangers linked with retail investors, in light of market instability.

The expert group will examine the weekly options closely because they are very appealing to retail investors who can engage with a small amount of capital, according to the sources. They mentioned that the rationalization of strike prices is important to prevent small investors from facing losses.

One source explained that retail investors often purchase options at a low cost, aiming for significant gains, and choose options far from being 'At the Money', resulting in a loss of their initial premium. 'At the Money' (ATM) refers to when the strike price of an option matches the current market price of the underlying asset.

According to sources, the expert team will also examine possibilities to enhance lot sizes. The National Stock Exchange decreased the lot sizes of index F&O following the re-launch of derivative products by BSE a year ago.