Move will create more tradable options

Effective April 1, strike prices of stock options would be determined on the basis of the price volatility of the underlying scrip instead of price of the scrip.

The move follows requests of sharper strike prices by broker members. The move will reduce the gap between the deepest out-of-the money (OTM) and deepest in-the-money (ITM) options.

In-the-money strike prices are those where the option buyer makes money by exercising the option to buy or sell while at-the-money (ATM) strike price is one where the option buyer neither makes a profit nor a loss. Out-of-the-money strike prices are those where the option buyer never makes money and hence is never exercised.

Strike price is the price at which the buyer (holder) of an option contract exercises his right to buy or sell the underlying shares.

Step value

NSE in a circular on Thursday said the step value between two option strike prices would be determined based on volatility of the underlying stock. The step value would also be reviewed and revised if required. Earlier, price steps between two strike prices were uniform and varied between Rs 2.5 and Rs 50.

According to a trader in Chennai, this move will help in improving liquidity in the option segment, as there will be more options in the tradable range.

Intra-day strikes

The number of call and put option strikes for each scrip would be a minimum of 11 (5 ITM, 1 ATM and 5 OTM strikes) and a maximum of 21 (10 ITM, 1 ATM and 10 OTM strikes). NSE could also introduce new strike prices intra-day.

The strikes already introduced for April 2013 and May 2013 expiry months would continue to be available till their respective expiry. The list of stocks and their new strike scheme shall be intimated separately, said NSE.

Earlier, stock options had 11 strike prices for stocks with market prices of up to Rs 500 and 21 for above Rs 500.

The NSE had the choice to introduce additional five strike prices for those scrips with 11 strikes and 10 strike prices for those with 21 strikes intra-day.

raghavendrarao.k@thehindu.co.in

(This article was published on March 7, 2013)
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