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BSE to launch index option trades Friday

BS Markets Bureau

The Bombay Stock Exchange is launching index options on Friday, pre-empting the National Stock Exchange for the second time in introducing derivative instruments.

The BSE's announcement comes just after a day of NSE's announcement to launch options trading in Nifty on June 4. BSE had launched trading in Sensex futures on June 9, 2000 before NSE launched Nifty futures on June 12, 2000.

As per the proposed contract specifications, BSE would launch its first index option derivatives product with its 30-share Sensitive Index underlying. The Sensex options would belong to the premium style, so that the buyer of the option would pay a premium to the seller in cash at the time of entering into the transaction.

The Sensex options would also be in European style, wherein the buyer (holder) of the options would exercise his options contract only at the expiry of the contract. The expiry would be on the last Thursday of the contract month. There would be call and put options contract with one, two and three month maturities.

There would be at least two 'in-the-money,' two 'out-of-the-money' and one 'near-the-money' options contract tradable at any time. When Sensex is at 3700 level, contracts available for trading would be with strike prices 3900, 3800, 3700, 3600 and 3500.

As the Sensex crosses 3800 or 3600, the new contracts with strike prices 4000 and 3400, respectively, would be introduced. In other works, whenever the Sensex moves up or down new contracts would be introduced. Once introduced, a contract is not withdrawn from trading.

The market participants would quote the price of the Sensex options, which are premium, in terms of Sensex points. For example, if Sensex is at 3700, interest rate is 10 per cent, volatility is 30 per cent, and time to maturity is 30 days, then the premium for a call option contract with 3600 strike, would be about 200 Sensex points. In money terms, the premium would be Rs 10,000 (200x50).

The tick size of 0.1 means that the minimum difference between bid and offer at any time can be 0.1 Sensex points or Rs 5 (0.1x50). The settlement value of the Sensex options would be the closing price of the Sensex on the expiry day, which is the last Thursday of the contract month.

If the value of Sensex close on the last Thursday is 4000, then the buyer (holder) of the option would exercise his options contract as his option is in the money.

Then the seller (writer) of this option contract against whom this exercise is assigned, would be obliged to pay Rs 20,000, which is the difference between the settlement value and strike 400x50) to the buyer. This means that the settlement of the Sensex options contract would be on cash basis.

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