Zerodha’s Founder and Chief Executive Officer Nithin Kamath believes that the suggested changes in the new F&O consultation paper released by the Securities and Exchange Board of India (SEBI) are unlikely to affect options volumes despite the government’s increase in the Securities Transaction Tax (STT) in the Union Budget 2024.
“The suggested changes, even with the STT increase, won’t really change options volumes. But on the flipside, they will reduce futures volumes,” Nithin Kamath said in a post on social media platform X on Tuesday, July 30.
Kamath says whether it is an increase in the STT in the Budget or the contract size going up to ₹20 lakh, these changes will incentivise futures traders to move to options.
A few thoughts on SEBI’s consultation paper on F&O:
The suggested changes, even with the STT increase, won’t really change options volumes. But on the flipside, they will reduce futures volumes.
From what I’ve seen at Zerodha, futures traders have higher odds of making money…
— Nithin Kamath (@Nithin0dha) July 30, 2024
However, future traders have a higher chance of making money as compared to the option buyers, said Kamath, citing his experience in Zerodha.
“Futures traders are profitable about 50% of the time as opposed to options traders, who are only profitable about 10% of the time,” the Zerodha founder said in the post. This happens because the options come with close to unlimited leverage, as compared to the leverage on the futures which is limited at six times or 15 per cent for the index, he observed.
SEBI released the consultation paper, titled ‘Measures to strengthen index derivatives framework for increased investor protection and market stability’ on Tuesday, July 30.
Kamath says if the regulator seeks to reduce market speculations, “then the solution is maybe to make it harder for non-serious people to trade by having a product suitability framework”.
What does the SEBI consultation paper say?
SEBI’s consultation paper aims to ensure better market liquidity and risk management, and control hyperactivity of derivatives trading.
The regulator has suggested increasing the contract size to discourage individual investors from participating in the trade.
“Minimum value of derivatives contract at the time of introduction to be between ₹15 lakhs to ₹20 lakhs,” said the consultation paper. “After 6 months, minimum value of derivatives contract to be between the interval of ₹20 lakhs to ₹30 lakh,” said the regulator.
SEBI has mandated the collection of 100 per cent margins on an upfront basis for the trades; however, there is no indication from SEBI’s side that options premium has to be paid and collected on an upfront basis, according to the paper. Along with these suggestions, the regulator has also looked into the strike price side where it is aiming to stop the tendency of traders gambling on cheap options contracts.
