Can I trade far month derivative contracts in Zerodha?
We at Zerodha, based on our internal risk management policies, allow trading on the below Contract months in the respective derivatives -
INDEX futures and options -
All the trading contract months. Only limit orders can be placed for far month contracts (greater than 2 months).
Stock futures and options -
All the trading contract months (3 months)
Commodity futures and options -
Futures - Current month and Next month (2 months)
Options - Current month only
Currency Futures and options -
Futures - All the trading contract months
Options - Current month and Next month (2 months)
Note: The far month duration of contracts are illiquid and have very few people trading them. If we allow clients to trade in these, and the market moves against the client's positions, there is a high probability that there will not be any counterparty for the client to exit his loss-making position. Due to this, the client will be forced to bring in additional margins to make up for these losses, and if the client defaults on this, as per regulations the liability will be on the broker.
Additionally, since these contracts are not liquid, if a client places a market order, the contract price moves drastically, with no actual movement in the underlying/spot. This again has regulatory implications for us as a broker.
Since stockbrokers have every right to take necessary steps to block any contract if they perceive high risk in allowing that contract to trade at any point in time, we have disallowed trading in the far month contracts and allowed it only in certain scrips.