SEBI’s recent move to review the Closing Auction Session (CAS) is a big thing for traders, especially those who are into Futures & Options (F&O). CAS was launched by the regulator in August to determine closing prices of stocks with futures and options contracts through a short auction at the end of the trading session. The new mechanism however, apparently caused sharp price swings in the derivatives, especially around expiry.
Now, SEBI is said to be considering a partial rollback after collecting more than 20,000 suggestions from market participants. The VWAP (Volume Weighted Average Price) of the last 30 minutes may be used to determine derivative settlement prices instead of the closing auction, at least for the next year. CAS may continue for less liquid stocks in the cash market.
How does this impact traders?
The main takeaway is less dependence on a single end-of-day auction price to settle derivatives.
The closing price of the underlying stock or index can have a significant effect on the final value of an option for an options trader, particularly when the underlying is close to the strike price. This means an unexpected move during an auction can result in unexpected changes in option values and expiry day P&L.
A 30-minute VWAP spreads price discovery out over a longer period, rather than allowing a short auction to have a disproportionate impact. This would make the settlement price potentially more representative of actual trading activity in the latter part of the session.
A bigger message of encouragement is that SEBI is listening to market feedback and tweaking the framework based on how the market actually behaves.
In an effort to help traders understand the concept of Closing Auction Session (CAS) vs 30-minute VWAP, a simple example will be given.
Illustration: How the Closing Price Might Change
Let us assume that ABC Ltd. is trading at ₹1,000 during the day. Stock traded in the last 30 minutes as follows:
TimePriceVolume3:00 PM₹99810,0003:10 PM₹1,00215,0003:20 PM₹1,00520,0003:25 PM₹1,00825,0003:30 PM₹1,01530,000
The 30 minute VWAP is calculated as;
VWAP = Sum (Price * Volume) / Sum Volume
So.
= [(998×10,000) + (1,002×15,000) + (1,005×20,000) + (1,008×25,000) + (1,015×30,000)] ÷ 100,000 = ₹1,006.65
Hence, if the settlement methodology is based on last 30 minute VWAP, the relevant closing/settlement price would be around ₹1,006.65.
Now let’s assume that there are plenty of buy orders in the Closing Auction Session and the auction price discovered is ₹1,015.
It's an important difference:
30 min VWAP = Rs 1006.65
Auction price: ₹1,015
That ₹8.35 difference may seem small in the cash market, but for a F&O trader with a big position, it can have a material impact on the final P&L.
A trader is short ABC futures with a lot size of 1,000 shares.
Settlement @ ₹ 1,006.65 → value = ₹ 10,06,650
Settled at ₹ 1,015 → value = ₹ 10,15,000
Difference Rs.8,350 per lot.
This is why the calculation method of the closing or settlement price is especially important on expiry day. A few rupees in the underlying can mean thousands of rupees in derivatives P&L.
Key takeaway for traders: Don’t just look at where the stock closes. Understand how that closing price is calculated, because the calculation can affect your expiry-day P&L.
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