Monday, July 9, 2007

NSE to relax strike rates to pep up volumes

The below move will help us to prove our trading methodology.

MUMBAI: The National Stock Exchange (NSE) has approved a change in strike price interval of Nifty options to allow greater flexibility to derivative traders while taking a view on the index. The proposal has been cleared by capital market regulator the Securities and Exchange Board of India, and the NSE will shortly be implementing the same, an official familiar with the development told ET. Currently, the strike price interval for Nifty options is 10, and the NSE has proposed that this be increased to 50.

The exchange follows a 9-1-9 format (9 strikes of interval 10 on either sides of the previous closing level) for introducing the strike prices on Nifty options (call/put). Assume that the Nifty has closed at 4000 on Monday, under the current rule, in a rising market, a trader cannot buy a Nifty option with a strike price beyond 4090 on Tuesday, as that would be the limit on the upper side.

Similarly, on the lower side, a trader cannot buy a Nifty option with a strike price below 3910. The Nifty is now trading over 4350, and traders have been complaining for long that the 90-point limit on either side does not leave them with enough room to hedge or take a directional call in the event of a sharp move in the index.

Also, there is very little activity in strike prices, having a multiple other than 50. Data collated by ET shows that most of the options with a strike price other than multiple of 50 are either illiquid or have very little volumes.

The exchange is now planning to introduce a 6-1-6 format of strike prices with an interval of 50. This means there would be a minimum of 13 strike prices, six ‘in the money’, one ‘at the money’ and six ‘out of the money’. Those options, which have certain intrinsic value, are called ‘in the money’, by virtue of the fact that they are holding some money right now. Those options whose intrinsic value is zero are called ‘out of the money’, by virtue of the fact that they are not holding any money right now.

Once the new format is implemented, traders in Nifty options will be able to take a 300-point bet on either side of the previous day’s closing. Derivative market observers say the NSE move is expected to boost trading volumes in Nifty options, which currently account for just about 10% of the total trading volume in the derivatives segment.

Derivative traders had been asking for introduction of intra-day strike prices by the exchange as opposed to the current policy of introducing strike prices based on the previous day’s closing prices. But once the new format (6-1-6 with a 50-point interval) comes into effect, there will not be any need of intra-day strike prices, till the Nifty rises multifold from current levels.                                                              

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