In order to enable smoother trading in case of market volatility, the Securities and Exchange Board of India (Sebi) on Monday proposed a framework to introduce and manage option contracts strike prices. This will be applicable for all segments, including equity, currency, and commodities.
The regulator proposes to improve predictability and availability of option strikes as sharp swing in the underlying asset leads to unavailability of contracts around the prevailing price for traders. Public comments on the proposal is to be submitted by June 15.
Fragmented Exchange Practices
Currently, there is only one regulatory mechanism dealing with the rationalisation of strike intervals for long-dated index options. Stock exchanges follow their separate frameworks to manage strike intervals.
A strike price of an option contract is the predetermined price at which a trader has the right, but not the obligation, to buy or sell the underlying asset. A strike interval is the gap between two strike prices.
Some of the measures proposed include rules for introducing options to cover minimum number of in-the-money and out-of-the-money contracts, daily review of availability of strike prices around prevailing market price, and periodic elimination of contracts that are far away from the spot price.
Zero-Disruption Intraday
The markets regulator has also proposed a provision to introduce new intra-day option strike prices during market hours, in the direction of price movement in the underlying asset, as per the consultation paper. Such strikes will not require any changes in market players’ systems during live market operations.
If implemented, stock exchanges will publish such framework on their website and review the framework periodically in consultation with market participants, Sebi said. Rule and formulae may differ across segments depending on liquidity and participation levels.