India’s market regulator, Sebi, has unveiled a new framework designed to enhance stability and accessibility in options trading by better managing strike prices, particularly during periods of high market volatility, ensuring traders always have suitable contracts available.
Photograph: Hemanshi Kamani/Reuters
Key Points
- Sebi has proposed a framework to govern the introduction and management of strike prices for options contracts, the highest volume-generating segment of the equities market.
- The new measures aim to ensure a minimum number of in-the-money and out-of-the-money (OTM) contracts are available, with daily reviews and periodic removal of irrelevant strike prices.
- The proposal addresses concerns that sharp intraday swings can push prices beyond available strike prices, leaving traders without suitable options for hedging or taking positions.
- The framework includes provisions for introducing new strike prices intraday during market hours, moving in the direction of the underlying asset’s price movement, without requiring system changes for brokers.
- The proposed rules will apply across all options segments, including equity, currency, and commodities, with public comments sought until June 15.
The Securities and Exchange Board of India (Sebi) on Monday proposed a framework governing the introduction and ongoing management of strike prices for options contracts, the highest volume-generating segment of the equities market.
The proposed measures include rules for introducing options contracts to ensure the availability of a minimum number of in-the-money and out-of-the-money (OTM) contracts, daily reviews of strike availability around prevailing market prices to maintain trading continuity, and periodic removal of strike prices that are significantly away from prevailing market levels.
Addressing Market Volatility Concerns
The proposal comes amid concerns that sharp intraday swings in underlying assets can push prices beyond the farthest available strike price, leaving traders without suitable options contracts to hedge or take positions.
In a consultation paper floated on Monday, the market regulator said that significant price movements beyond the farthest available strike may inconvenience market participants because of the absence of appropriate options contracts.
The proposed framework seeks to address this gap through a more structured and responsive mechanism.
At present, only one regulatory framework deals with the rationalisation of strike intervals for long-dated index options, while stock exchanges separately follow their own mechanisms for managing strike intervals for options on underlying assets and futures contracts.
A strike price refers to the predetermined price at which an options trader has the right, but not the obligation, to buy or sell the underlying security.
A strike interval refers to the gap between two strike prices and is designed to balance product availability with market liquidity.
Impact on Trading Activity and System Overheads
Sebi observed that strike intervals have a direct bearing on trading activity and product availability for market participants.
Frequent additions or revisions to contracts also require corresponding daily updates on brokers” trading platforms and applications, increasing system-related overheads.
“The framework shall have a provision to introduce new strike prices (i.e., options contracts) intraday during market hours, in the direction of price movement in the underlying,” Sebi said, adding that such intraday additions should not require changes to the systems of stockbrokers or market participants during live market operations.
Industry players said the current strike price structure already accounts for sufficiently large market swings.
However, they added that a formal framework around this would be a welcome move.
For instance, the Nifty 50 index options chain for the May 26 expiry carries 144 strike prices, ranging from 20,100 to 27,250, against the Nifty”s latest close of 24,032.
This translates into available strikes roughly 16.4 per cent below and 13.4 per cent above the current index level.
Concentration of Trading Activity
However, trading activity remains heavily concentrated around at-the-money and near OTM contracts.
Data from the options chain show the highest put open interest clustered around the 24,000 strike, followed by the 23,500 and 23,000 strikes, while call-side activity is concentrated around the 24,500 and 25,000 strikes and nearby levels.
This reflects the preference among retail traders and short-term participants for relatively inexpensive OTM contracts, which dominate volumes in the index options market.
The proposed framework will apply across all options segments, including equity, currency, and commodities.
Sebi said rules and formulae may differ across sub-segments depending on liquidity and participation levels.
The framework will also be reviewed periodically in consultation with market participants.
Sebi has sought public comments on the proposals until June 15.
