The Securities and Exchange Board of India (SEBI) has recently announced plans to ease its proposed restrictions on index options trading. This move is aimed at balancing the growing activity in the derivatives market with investor protection. In India, equity derivatives — especially index options — have grown significantly larger than the cash market. SEBI now aims to strike a balance between market stability, investor safety, and trading efficiency.
In this article, we will explore SEBI’s proposed changes, their implications, and what the future may hold.
What’s Happening?
SEBI is considering increasing the net positional limit for traders or entities in index options from Rs 500 crore to Rs 1,500 crore (for both calls and puts), with an overall gross limit of Rs 10,000 crore for all positions.
Intraday trading may be exempt from these limits, but a robust monitoring framework will be implemented. As per this framework, exchanges and SEBI will track intraday positions four times a day. If any trader exceeds the allowed exposure, SEBI will investigate for possible market manipulation.
Policy Revisions by SEBI
SEBI is likely to ease some of the restrictions it proposed in February on equity futures and options trading, following pushback from market participants.
The February circular had proposed positional limits of Rs 500 crore for options and Rs 1,500 crore for futures to curb market dominance by large players. However, brokers and traders expressed concerns about these limits being too restrictive and potentially impacting market liquidity.
Reports suggest that a SEBI-appointed panel has recommended relaxing limits on index and single-stock derivatives, and scrapping the penalty provision for breaching trading limits. That said, the plan to revise the methodology for calculating open interest or outstanding positions in futures and options remains in place.
In the futures segment, revised positional limits could be set based on the category of market participants, such as foreign portfolio investors (FPIs), mutual funds, and proprietary traders. The overall cap on trading members — including both client and proprietary positions — may also be increased.
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Recent Changes and Market Response
In February 2025, SEBI proposed measures to align risk metrics in the derivatives segment with real market exposure. Based on public feedback, SEBI has revised its policies, including a softening of limits on index options.
Earlier restrictions — such as raising the minimum contract value to Rs 15 lakh and limiting weekly expiries to one per exchange (implemented in November 2024) — had a noticeable impact on trading volumes.
As a result, the volume of index options (in premium terms) fell 15% year-on-year, although it remained 11% higher compared to two years ago. Similarly, participation by individual traders dropped 5% YoY but was still 34% higher than in 2022.
What Does This Mean for Investors?
The revised policy could offer several benefits for investors, especially large and institutional traders. The increased net limit of Rs 1,500 crore and gross limit of Rs 10,000 crore would allow traders to take larger positions — making it easier to hedge sizable portfolios.
This could lead to improved liquidity in the market, tighter bid-ask spreads, and lower trading costs.
Exempting intraday trading from these limits will offer more flexibility during market hours, especially benefiting high-frequency traders (HFTs) and algorithmic trading firms. Meanwhile, SEBI’s enhanced monitoring will ensure that market manipulation and excessive risk-taking are kept in check.
What’s Next?
SEBI’s approach signals a major shift towards balancing regulatory oversight with trading freedom in India’s derivatives market. While earlier restrictions had a moderating effect on volumes, the market remains significantly larger than it was two years ago.
With its data-driven policy framework and tighter surveillance mechanisms, SEBI aims to foster market stability and bolster investor confidence.
Experts believe that despite past interventions, SEBI remains concerned about the high activity in index options. The latest adjustments are designed to strike a balance between trading efficiency and strict risk control.
*The article is for information purposes only. This is not investment advice.
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