The long-awaited prescription for F&O addicts came up on 1st October 2024 from the Market Regulation lab of SEBI. The market regulator has stipulated six-point remedy program for Rs. 2 lakh Crore loss to retail investor in F&O segment. Prima facie, the remedies sound good. We can classify these remedies into three segments: measures to curb heightened activity in index options on expiry day, suitability of index derivative products for investors and maintenance of risk mechanism. We will discuss these remedies in a series of articles. (This is second article in the series.)
Remedy No. 2: Removal of calendar spread treatment on expiry day: In simple terms SEBI has said that calendar spread margin treatment will not be available on the day of expiry. Let me explain a calendar spread.
As the name suggests, calendar spread is an F&O strategy based on calendar. There are five expiries in October 2024: 3rd October, 10th October, 17th October, 24th October and 31st October. If one sells one lot of Nifty 26000 CE of 10th October 2024 and buys Nifty 26000 CE of 17th October 2024, it will be called a calendar spread. It’s hedged position but seldom works on expiry day.
A trader making aforesaid strategy anticipates bullish sentiment in Nifty after 10th October 2024. His sell position in option is also hedged. He has to pay less margin for selling Nifty 26000 CE of 10th October 2024 due to arrangement of cross margining. SEBI has said that the arrangement of cross margining will not work on the day of expiry. It’s a rational move. Let us take expiry day of 10th October 2024. One has sold Nifty 26000 CE of 10th October 2024@ Rs 10 and bought Nifty 26000 CE of 17thth October 2024 at Rs 100. In last half an hour before expiry, if Nifty moves to 26100, the value of Nifty 26000 CE of 10th October 2024 expiry will jump to Rs 100 and the trader will make a loss of Rs 90*25=Rs. 2250/-. On the other hand, the price of Nifty 26000 CE of 17th October 2024 may rise up to Rs 150 only. This means a gain of just 25*50= Rs 1250. Therefore, aforesaid calendar spread will incur a loss of Rs 1000 per lot despite being hedged. Keeping in view the same, SEBI has said that calendar spread treatment will be removed on expiry day.
SEBI has said that if you have two legs of calendar spread and no leg belongs to current expiry, the treatment of calendar spread will not be removed. For example, if calendar has two legs of Nifty 26000 CE of 10th October 2024 and Nifty 26000 CE of 17th October 2024, its calendar treatment will be removed on 10th October expiry day. If calendar spread has two legs of Nifty 26000 CE of 17th October 2024 and Nifty 26000 CE of 24th October 2024, then the treatment of calendar spread will not be removed on 10th October expiry day.
If you wish to work with calendar spread despite changed Provisions of SEBI, better go for remote expiries. SEBI won’t be able to disrobe you of calendar spread treatment. SEBI has clarified that ‘the existing margin calculations for calendar spread positions (i.e. worst scenario loss, calendar spread margin and ELM) shall remain unchanged for calendar spread positions involving all expiries other than the contracts expiring on a given day’. (Para 5.2.3 of SEBI Circular dated 1st October 2024).
This measure will be applicable from 1st February 2025.
