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SEBI Says OK To More Derivative Contracts


SEBI has allowed the introduction of new derivative products in the Indian Captial Markets.

Let me try to explain what new types can be used. Remember that some of the following fundas are speculation because it’s only when the actual derivative is announced is when we know exactly what it means. Right now it’s a very “global” sort of announcement.

  • Mini contracts: Smaller versions of actual futures or options contracts. Typically each futures contract should be of around 2 lakh underlying value. So when the Nifty was 4000, the lot size of an F&O Nifty contract was set as 50. But now it’s reached 6,000 – and with a 50 Lot size, the value is around 3 lakhs. RNRL, whose lot size is 7150, has an underlying value of more than 10 lakhs (at about 150 market price). This is obviously too high, but the exchanges can’t go around manipulating lot sizes very often, and of course small investors can’t use such futures at all. A mini-contract will help reduce the amount of the underlying derivative – for example, a mini-RNRL contract may be 1/10th of the original – a size of 715 – which can be traded by a smaller investor as well.
  • Longer tenure options: Currently only options for current month and the next two months are traded. This may be extended, and I would imagine this may only extend to 6 months. Still, the option market is extremely lousy; there’s very little liquidity in most stock options (Nifty options are ok though) and very very big bid-ask spreads. Given that very few options trade on even the current month, introduction of 6 month options is probably irrelevant. Try searching for traded options on the BankNifty. You’ll find out what I mean.
  • Volatility indices/F&O: The US has a volatility index – the VIX – which gives people an idea about how broad the range is that the market moves by. Having a tradeable index gives one the opportunity to do interesting arbitrage such as writing calls or puts and being long a volatility index, thus giving one a hedge in case the option gains volatility premium.
  • Options on Futures: This is speculative but I believe they mean options with the future as underlying rather than the stock. This is a waste of time, because that’s how it works now anyhow.
  • Exchange Traded Currency F&O: I don’t know if this means rupee versus other currencies or stuff like USD-JPY but whatever it is, will be good for us.
  • Exchange Traded Products for different investment strategies: I don’t know what this means, but I hope it means the ability to provide ETFs or such that use system trading concepts rather than just matching an index. This is something Moneyoga would be intensely interested in – just need more clarification on the terms used.

Note that all these products aren’t currently there – each exchange needs to introduce them after getting SEBI approval etc. But in principle, these are products that are agreeable by SEBI and we are likely to see some, if not all of the above in some way in our markets. When? I wish I knew.


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