Why am I not able to place Bank Nifty, Nifty option orders for certain strike prices?
Every brokerage firm has a restriction in terms of maximum Open interest (OI) or total positions that can be taken across futures and options of any scrip, across all its customers. This is 15% of the overall market OI. We are the largest retail brokerage firm in India and unfortunately, this has also meant that we have been hitting this OI limit set per broker for Nifty and Banknifty. Due to this, we are forced to restrict trading buying options in certain strikes, mostly out of the money options (OTM).
OTM options not only add open interest quickly but are also the main reason for trading losses of retail customers. Losses because buyers of an OTM option are constantly fighting time value and also because most retail investors don’t apply basic risk management principles of not buying options with more than 5% of trading capital or stoploss of 1% of trading capital per trade. While not being able to trade OTM options might seem restrictive, we believe that this invariably will help most of our retail customers.
The time value of options depreciates faster overnight than intraday. Also if a customer trades options only for intraday, it doesn’t really add up to our end of day OI limits. So we now allow trading across a larger range of strikes if you are trading using product type MIS (Intraday only). When you trade using MIS, you have to forcibly square off all positions at the end of the day. We now don’t allow conversion of MIS positions to NRML for Nifty and Banknifty option contracts in case of buy positions. This to ensure that the conversion doesn’t add up to our end of the day OI limit, but we believe that this will also be a risk management measure for customers who turn their intraday trades into overnight positions just to avoid booking a loss.
When you initiate a buy order in an option, you can see the strikes available for trading NRML(if you intend to keep positions overnight) and MIS.
If you still want to trade across all contracts, we have a custodial account partnership with Orbis. If you trade only F&O, we can help you open a custody account for free and allow transactions across all strikes for no additional costs. You can check this article for more details.
- You can square-off your existing positions even if the strike price is not within the trading range.
- You can take new short positions in contracts outside the trading range. The restriction is only in place for buying options.
- If you have an existing short position, you can hedge your trade by buying options without any range restriction.
- If you have an unfilled open order while the trading range gets modified to restrict orders for that strike price, you will not be able to modify your existing order.
Why are there Open interest restrictions for a brokerage firm?
Futures and short options positions carry unlimited risk. If clients default, the liability lies on the broker. To ensure such a risk isn’t systemic, SEBI has put in a restriction that the maximum OI of any brokerage firm can’t be more than 15% of the overall OI of any scrip. While this is a reasonable risk management policy there is an issue.
Open interest of all long or buy option positions are also considered to determine the risk. Unlike futures or short options where there is unlimited risk, with buy or long options, the risk is limited to the premium paid. So ideally long options should be looked at as lower risk and OI restriction should maybe be different as compared to Futures and short options. We have been requesting exchanges to look into this.
The Open interest restriction issue is also exaggerated because post the volatility in March 2020 due to Covid, SEBI put in tighter restrictions on max OI per customer, which has impacted institutions and large prop brokerage firms. This has meant that overall OI in the market has reduced from institutions/prop firms and increased from retail. When SEBI relaxes on the special measures that they had put in place last year, the overall OI in the market should go up.