In today’s Finshots we tell you all about the new F&O rules introduced last week and what they could mean for how equity derivatives trade going forward.

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The Story

Let’s start with the problem.

Every Tuesday and Thursday, India’s stock markets turn into a bit of a circus. It’s expiry day, when weekly options die and retail traders flood in hoping to make a quick buck. The contracts are cheaper. The expiry is near. And the chance to turn ₹10,000 into ₹100,000 is just too tempting. So they bet on options with zero days to expiry (or what’s called ‘0 DTE’). No overnight risk, just a few hours to glory.

And this strategy has exploded. Back in 2019, retail traders made up just 27% of the index options turnover. Today, that number has shot up over 35%. Social media groups discuss option levels like cricket scores. Some platforms let you trade with the click of a button. And the volumes are at an all-time high.

But here’s the catch. These derivatives trades often have little to do with the underlying stocks. They’re driven by momentum, crowd behaviour and adrenaline. And when things go wrong, they can move prices wildly, not just in derivatives, but in the actual cash market too. That’s a problem for SEBI. Because when speculation grows faster than the market can handle, it can shake the very foundation of price discovery.

So last week, on May 29, the Securities and Exchange Board of India (SEBI) released a 21-page circular that could rewrite the rules to mitigate a crisis like this. And if you trade in futures and options (F&O), or even if you’re just curious about how this corner of the market works, you should probably know what’s changing.

First, SEBI is changing how risk is measured. Right now, if you hold 1,000 lots of Bank Nifty calls and someone else holds 1,000 lots of Bank Nifty futures, you’re both seen as having the same exposure. But that’s not really true. Options behave differently based on how close they are to the strike price, how volatile the market is and how much time is left to expiry. So SEBI says, let’s not count lots. Let’s count delta.

Now delta is just a number that tells you how much your option behaves like the actual stock or index. A future has a delta of 1 means it moves exactly like the underlying stock. But an option might have a delta of 0.5 or even 0.2 depending on how far out-of-the-money it is. So if you hold a lot of 100 long calls with a delta of 0.5, SEBI will now treat that as 50 futures worth of exposure. It’s called Future Equivalent Open Interest or FutEq OI. This lets everyone from retail traders, brokers and the regulator speak the same language when it comes to measuring risk. And clearing houses must publish this for every script from now on.

Second, SEBI is fixing the issue of ban periods. In F&O, every stock has a limit on how many contracts can be held across all traders. It’s called the Market-Wide Position Limit (MWPL). When traders cross 95% of that limit, the stock enters a ban period. In theory, that means no new positions can be created. But in practice, traders found loopholes like closing old positions, flipping to the other side of the trade or using complex strategies that technically reduced one exposure while adding another.

So SEBI’s new rule is simple: once a stock hits the ban, your net delta must shrink by the end of the next trading day. You can’t flip your exposure from long to short. You can’t make it more complicated with options that cancel each other out. The delta has to be reduced, period. So say if you’re long 100 futures worth of delta today, you better be at 50 tomorrow. This rule kicks in on October 1, 2025.

Also, MWPL itself is getting smarter. Instead of a blanket rule that allows up to 20% of a stock’s free-float shares to be used in F&O, SEBI will now link this limit to actual delivery volumes in the cash market. The new formula? It’ll be the lower of 15% of free-float shares (or shares that’s actually available for public trading and not locked with promoters) or 65 times the average daily delivery value (which measures how many shares are bought and held, not just traded intraday). And there’s a floor—it won’t drop below 10%. This means you can’t have an outsized derivatives market in a stock that hardly trades in the cash segment. This also goes live on October 1, 2025.

There’s also a clampdown on index speculation. Going forward, one can’t have more than ₹1,500 crore worth of net delta exposure in index options. That’s the total directional exposure once all your calls, puts and hedges are adjusted for delta. And whether you’re long or short, your gross exposure in either direction can’t cross ₹10,000 crore. These rules begin on July 1, 2025, but there’s a “glide path” which simply means that SEBI will first send warning emails if you cross limits, and only from December 6, 2025 will penalties start to apply.

Then there’s the new pre-open session for futures. Just like the 9:00–9:08 am window in the cash market that helps discover opening prices of stocks, SEBI will introduce a similar session for current-month futures starting December 6, 2025. During expiry or a rollover week, even next-month futures will get this window. The goal? To reduce morning volatility and avoid wild opening ticks.

One more change—if a new non-benchmark index wants to have F&O contracts on it, it can’t just be a fancy name with a few giant stocks. It must have at least 14 constituents. No single stock can have more than 20% weight. And the top three constituents combined must stay under 45%. This ensures no one’s sneaking exposure through a single stock of an index. These rules will apply from November 3, 2025.

And for individual traders, SEBI is tightening position limits too. Whether you’re a retail client, foreign portfolio investor (FPI) or a mutual fund, your exposure to single-stock F&O will be capped at a percentage of the recalibrated MWPL. For most retail clients, this cap will be 10%. This goes live on October 1, 2025.

Now, all of this could sound like alphabet soup. Delta. MWPL. Ban periods. Glide paths. But the bigger message is clear. SEBI is saying you can still speculate. But now you have to do it with guardrails. You have to understand the real risk of what you’re holding. And your bet must float on a pool of actual liquidity.

If you’re a serious trader, this might nudge you to learn about delta, risk metrics and margin impact. If you’re a casual punter, this could save you from getting wrecked on expiry day. And if you’re a broker, you’ve got a lot of coding and compliance to finish before July.

Let’s take a closer look at these.

For one, retail traders will have to upskill. Until now, you could trade options without really knowing what delta meant. But with positions, bans and penalties now tied to delta-adjusted exposure, ignorance won’t just be risky but expensive as well. Brokers know this too. You’ll likely see trading apps roll out delta calculators, position dashboards, maybe even AI nudges that say, “Hey, your delta is breaching the limit.” So risk will be visual, not just theoretical.

Second, option writers, especially those running large books, will have to rethink sizing and hedging. The gross exposure caps mean that splitting trades across strikes or expiries won’t necessarily bypass the limits. And if you’re running intraday strategies with high notional exposure (but tight deltas), you still risk crossing the gross cap and triggering margin calls.

Third, the days of using illiquid stocks for leverage or arbitrage games are numbered. The tighter MWPL linked to delivery volume means those ‘ban list rallies’—where a stock hits the ban and then surges on low float—may not work anymore.

And for algo desks and institutional traders, real-time delta tracking now becomes non-negotiable. You can’t rely on end-of-day reconciliations anymore. If your systems don’t keep up by December, you’ll bleed penalties, or worse, get forced out of positions overnight.

And all of this might also push some high-risk volume offshore. If you’re a trader who thrives on taking large expiry-day bets with lightning-speed hedging, you might start eyeing SGX or other such instruments more actively. After all, speculation doesn’t die. It migrates.

So yeah, SEBI’s new rules may seem like technical plumbing changes. But they’re setting the tone for the kind of derivatives market India wants. Not slower or smaller but smarter, cleaner and harder to game.

And that, depending on where you stand, could either be a killjoy or a godsend.

Until then…

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