The market regulator is mulling several steps to curb excessive speculation in the derivatives market.

One is to increase the minimum lot size from ₹5 lakh to ₹20-30 lakh. This could impact the retail segment as the increased capital requirement may make trading unaffordable.

More than 75 per cent of traders in the options segment have a turnover of less than ₹10 lakh every month. “Of the 45 lakh active traders, 35 lakh are trading with such low turnover. By increasing the minimum derivative contract value to ₹30 lakh, they are trying to curb the participation of these retail traders,” algo trader Kirubakaran Rajendra said on X.  

He added that if the entry barrier is increased, participation will go down. “When someone cant make money with ₹10 lakh, he can’t make money with ₹30 lakh. So, people won’t be motivated to borrow more,” he said.

Restricting weekly options to one expiry per stock exchange per week could reduce trading flexibility for those who prefer short-term strategies, said experts. Limiting the number of strike prices for options contracts could restrict the ability to change positions to specific market expectations.

Options trading has a high skew, with about 20 per cent of retail option traders likely driving 90 per cent of premiums.

“An increase in lot size combined with fewer weekly expiries could be a feasible solution (to flush out retail activity from the market). These steps will potentially curb accessibility for low-ticket retail (largely option buyers), whereas the impact on the profitability of high-ticket players (algo firms/HNIs) due to higher margins/position limits needs to be assessed,” said a note by Kotak Institutional Equities.

Other measures, such as higher margins and monitoring of position limits, are probably aimed at restraining non-retail volumes, it said: “We need to see the effectiveness of all of these measures put together, along with the potential second-order effects.”

Complex product

According to the brokerage, among the available alternatives to trade equities (intraday, delivery, futures and options), options is by far the most complex product and yet has the lowest cost both in terms of ticket size and transaction costs, with the highest leverage to the underlying spot.

“If the strike prices are widened, the options premiums will go up and the per trade profit or loss amount will jump substantially, even on an expiry day. That will put off a lot of retail traders,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

Regulatory interventions in the past had a crushing and lasting impact on volumes in Korea (options) and China (futures).

“The US is going through a few similar challenges as India, leading to consultations (and enforcement actions) regarding the level of duty to be placed on self-directed apps and to minimize harm for retail traders. Recently, the RBI’s interventions in the currency derivatives market caused a major upheaval, leading to a sharp decline in volumes,” the Kotak report said.