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Interestingly, there is only one clause that goes live from today: “Increase in tail risk coverage on the day of options expiry”. Impact of balance 5 clauses will be seen progressively from 1st December 2024 to 30th April 2025.

So let’s understand what changes from tomorrow.

Increase in tail risk coverage on the day of options expiry will mean that from tomorrow ELM Margin for all Index Derivative contracts expiring on the same day will increase by an additional 2%. ELM increased from 2% to 4%; Overall Margin increased from broadly 11% to 13%.(Broad Math for understanding)

Since tomorrow we have Nifty weekly expiry, customers may have to add some margin to their trading accounts, if they have short positions in Nifty 21 Nov expiry contracts and they haven’t left a buffer margin in their accounts. Please note that this will apply to Sensex on 22nd November behind the expiry day for Sensex and so on and so forth. 

Let’s do some Math to understand this in a bit more detail.

Margin on expiry day contract goes up by 2%. Say, Nifty is currently at 24,000 and lot size is 25. So the contract value becomes Rs 6,00,000. So current margin at 12% should be around 72,000/-. This will increase by 12,000 being 2%. So new margin will be 84,000. Which means a 16-17% increase in margin. 

(These are broad numbers used to help you understand this better. Exact may be a bit lower/higher)

While 2% increase in margin may sound small, but many are seeing massive shortfalls in their accounts. Why so? Because in the old regime, the margin requirement on ATM strikes was around 12% of contract value. However, it used to drop as we go out of money to 11%, 10%,……8%……so on and so forth. 

So, in case of ATM strikes, it may look like 72K margin going to 84K, which is 16-17% increase, but for say a 22K OTM strike margin will increase from 37K to 50K, being a 35% increase. 

Which means that, the more out of money you go, the increase will be even steep.

Conversely, for ITM strikes, the increase will be less than 16-17% we see on ATM strikes.

In short, ELM increase of 2% applies direct on contract value. No hedge benefit. It may be significant for hedgers. This in my opinion has the capacity to move the needle.

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