Important Developments for Derivatives Traders

If you're a retail trader, your derivative trading options just improved and worsened at the same time.  How so? Two major developments occurred this week, regarding derivative contracts on offer.

First came the news that SEBI decided to increase the minimum contract size for equity derivative products from 2 lacs to 5 lacs.  Starting this October, the margin requirement for a Nifty futures contract will jump from around 16,000 to 40,000 rupees.

Their rationale: protect small investors from these products. Or rather, prevent them from trading derivatives at all.  Now I think this is a bad idea.  Rather than stop retail investors from trading, they should focus more on ensuring better education and greater transparency. Not to mention that increasing the contract size will cause a drop in volume.

While trading equity derivatives is getting harder, trading commodities is getting easier.  Earlier this week, the MCX launched a new gold contract called Gold Global.  This is a little different to their other contracts, as it depends on the international gold price instead of the domestic gold price.

The usual gold contract includes import taxes, while Gold Global excludes them. For this reason, the Gold Global contract has a lower price that the other gold contracts.

But one thing to keep in mind here is that trading the returns on Gold Global will be around the same from the returns on other gold contracts.  This means that although the prices for each contract are different, the price changes on a daily basis will be around the same.  So it won't matter which one you trade.

The MCX has been at the forefront of making trading commodities more accessible. Earlier this year, they launched a Crude Oil Mini contract, and this has been wildly successful.  In fact, all the Alpha Trader recommendations use Crude Oil Mini instead of the standard Crude Oil contract.

The conclusions from all these developments is that equity derivatives are getting more difficult to trade.  At the same time, currency and commodity derivatives are very accessible to retail investors.  You don't need a huge portfolio to trade them.

If you are new to derivatives trading, I highly recommend trading contracts that are small.  The smallest derivatives contract you can trade is the dollar rupee futures contract. You need only around 2,000 rupees to trade of these contracts.  

What do you think of the Nifty contracts increasing in size?  Share your views in the comments here.