Thursday, October 28, 2010

SEBI allows bourses to shift to European-style options trade


Capital market regulator the Securities and Exchange Board of India (Sebi) has allowed domestic exchanges to introduce Europeanstyle stock options, a move that is expected to boost volumes in these contracts. Currently, stock options on Indian exchanges are in the American style, which can be exercised during any time of the contract’s tenure. With the introduction of European stock options, a buyer can exercise the contract only on the expiry day. Exercising an option means terminating a contract. European stock options eliminate the uncertainty an options seller faces in American contracts. 

“In European options, the seller is sure that the money he got from writing options is there with him till the expiry day. That is not the case in American options, where the seller gets to know that the contract has been exercised by the buyer only the next morning,” said Alex Mathews, head-research, Geojit BNP Paribas Financial Services. 

Analysts said the absence of this uncertainty will encourage more traders to sell stock options in India. Nifty contracts already follow the European style. 

Stock options contribute about 3% to the total number of equity derivatives contracts on NSE. Index options contribute over 59%. 

“Stock options are not popular partly because of the risks involved in American contracts. Now, a change to European style may give a boost to volumes,” said Amit Gupta, derivatives strategist, ICICIdirect. 

The securities market regulator, in a circular on Wednesday, directed stock exchanges to set up systems to introduce European style options. 

“After opting for a particular style of exercise, a Stock Exchange shall offer option contracts of the same style on all eligible stocks ,” it said.

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