Options Delivery – How interesting a product could this become?

The regulator proposes to come up with detailed guidelines for permitting actual delivery against stock futures and stock options. Currently, all transactions on the F&O segment in the equity markets are cash settled only. That means, irrespective of whether you reverse your position or exercise your option, the eventual impact will only be adjusted in cash. That defeats the entire purpose of exercising the option and that is what the SEBI is now trying to redress…

May begin with stock options… 

While the proposed note is currently put up for public comments, there are some broad pointers that are emerging of the likely color of the product. It is likely that SEBI may commence with delivery on stock options and then may extend to stock futures too. In India, stock futures and options have been used more as a proxy for punting on the stocks by paying a lower margin and therefore getting a higher leverage. That is what SEBI wants to curb. The regulator feels, and rightly so, that the introduction of delivery against options could induce more stability and less volatility in the equity markets, especially around the expiry period. In the current scenario, there is a rush to cover options position ahead of expiry and that results in unnecessary volatility in the markets. This can be largely avoided if delivery were to be permitted against options. More so, as retail and traders are active in stock options!

How options delivery will help? 

Firstly and foremost, stock options will not serve as a proxy for the cash market with leverage. Of course, like in the commodities market, traders will still have the facility of reversing their positions and settling their trade on a cash basis. Exercising the option and converting it into delivery will be purely optional. So, it does not change the game for the traders in options in any way. What it does is to offer an additional avenue for delivery buyers and sellers to use the options market as a proxy for cash buying or selling. It helps buyers and sellers to lock in their stock purchase or sale at a certain price and this becomes invaluable in a highly volatile equity market.

There will be hurdles…

Principally, there could be 3 challenges for delivery options to take off. Firstly, this exercise can become meaningful if traders have the facility to short sell and then borrow stock and get delivery. That is yet to take off in a big way. Secondly, the higher STT on exercise and delivery could queer the risk-return trade-off in case of stock options and that needs to be factored in. Lastly, the VWAP price at which options will get converted into equity is still subject to manipulation in case of mid-cap stocks and that is something the exchange needs to be wary of. All said and done, it is a good start for F&O markets! ©

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