In a consultation paper issued recently, SEBI proposed a revision in the calculation of open interest (OI) from notional basis to future-equivalent or delta-based approach. This week, we explain this proposal and look at the possible impact on your trading in the event the proposal is adopted.

OI is the number of contracts that are carried forward to the next trading day on a given underlying. This metric relates to each option strike and to each expiry month in the case of futures. OI is a cumulative metric; the count starts when the contract is offered for trading by the NSE and ends on the expiry of the contract. For instance, the OI on the March 2025 futures contract started on the last Friday of December 2024 and will end on the last Thursday of March.

OI is used as a metric to cap the number of contracts traded on an underlying. If the OI on all options and futures on an underlying accumulates to 95 per cent of the market wide position limit (MWPL), NSE will ban further trading on these contracts. Trading will resume only if the OI declines below 80 per cent.

Currently, the number of outstanding contracts is simply added to arrive at the OI number in relation to the MWPL. SEBI wants to revise this methodology to delta-adjusted approach. Suffice it to say that an open position on an out-of-the-money (OTM) may not have the same impact on the OI as it does now. This is because the farther an option strike is from the underlying price, the lower its delta; delta is the approximate change in the option price for a one-point change in the underlying. Also, SEBI wants to align the OI to the average daily delivery value instead of the average daily traded value.

SEBI consultation paper states that these measures will reduce the number of cases entering the ban period. Retail traders may not be overly concerned about contracts entering the ban period. But there could be a side-effect to these measures. Currently, large brokers typically do not allow their clients to buy deep OTM strikes. This restriction is linked to the SEBI guideline that caps the OI at 15 per cent per trading (broker) member. A change to delta-based OI could prompt these brokers to offer such previously restricted strikes to their clients. It is, of course, moot whether buying deep OTM strikes is worthwhile.

The proposed change to delta-based OI will affect options and not futures. This is because the delta of futures is considered as one, as futures prices move nearly one-to-one with the underlying. It is moot if delta-adjusted OI on options will suffice, given that an option’s delta also changes (gamma) with the underlying. The SEBI paper acknowledges gamma risk and suggests NSE capturing delta-adjusted OI at four random times during a trading session to account for the risk.

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