Derivatives

How long-term Nifty options work

Akhil Nallamuthu BL Research Bureau | Updated on June 19, 2021

The National Stock Exchange (NSE) introduced long-term options contract on Nifty 50 back in 2008. Commonly known as LEAPS (long-term equity participation securities), these are option contracts with expiry time more than one year. Except longer expiry period, these contracts are identical to the shorter-term option contracts. Currently, LEAPS are available only on Nifty 50 index. Other than seven weekly expiries, three monthly expiries and three quarterly expiries, NSE offers long-term index options i.e., next eight half yearly expiries after the three quarterly expiries, which are the index LEAPS.

LEAPS can be more suitable to traders who look to take long-term exposure on indices and for investors who are looking to hedge portfolios. Otherwise, traders and investors who wish to take exposure in options for more than one year ought to rollover the contracts every month, incurring additional cost. However, the cost of long-term options for the strike price will be comparatively higher because of the longer time to expiry. For instance, the premium of 15000-strike Put option that expires in July 2021 and December 2022 are ₹71 and ₹687, respectively. However, the liquidity in LEAPS have been considerably lower which translates to higher and erratic spreads i.e., the difference between the bid and ask price. In general, price of long-term options is less sensitive to the movement of underlying and passage of time and more sensitive to changes in volatility and interest rates.

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Published on June 19, 2021

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