BSE ready for index-based options

NetScribes/Salil Panchal

The Bombay Stock Exchange (BSE) has notified the Securities and Exchange Board of India (SEBI) that it is prepared to commence index-based options by November this year.

BSE is set to introduce four to five series of index-based options. These would be similar to European cash-settled contracts, with one Sensex contract being in multiples of 50 units.

Manoj Vaish, chief executive officer of BSE's derivatives committee told NetScribes, "Currently the trading interest in index-based futures is low at 300-700 contracts. I would have expected that by this stage the Indian capital markets should have seen 2,000 contracts taking place. However, once the systems, procedures and broker interest picks up, the volumes are bound to increase."

Trading interest in index-linked futures at both BSE and NSE has been average but at no stage, strong. While trading in Sensex futures has been steady in recent weeks, there has been an improvement in Nifty futures.

According to latest data available, the October Sensex-linked future touched a high of 4,349, with 46 contracts struck and a total value of Rs 9.94 million. The open interest, which reveals the depth of the market, is placed at 845 for the Sensex futures and 345 for Nifty futures.

While volume traded indicates the liquidity, open interest reflects the depth of the market as well as the liquidity. Open interest is the sum total of all long positions (which would always be equal to sum total of all short positions). Higher the open interest, the higher the depth in the market. The ratio of volumes to change in open interest gives an indication of the extent of day trades in the market.

In the current volatile markets, brokers would be the first to shift to index-based options. The interest from domestic financial institutions and mutual funds is, however, expected to remain poor. The other end of the trading segment, the foreign institutional investors, are yet to make a major move towards index-based futures. They are expected to be even more cagey for index-based options.

With the risk-management team of SEBI still to spell out the guidelines relating to such trading, marketmen don't expect trading in these products to kick off until early January.

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