Search the Internet          Tips  Sites: Finance, Investment

Options trade to grow after edgy start

Stock options trading in India, due to start on Monday, will get off to a slow start as investors lack understanding of the new system but will pick up in coming months, analysts say.

As Indian bourses get ready to replace a local century-old carry-forward trading system with globally accepted hedging instruments, traders and analysts are confident the new system will take off once initial resistance to change is overcome.

"Options give the holder much greater financial leverage and no margin money is payable by the buyer of this facility," said K Ramachandran, head of research at Tata TD Waterhouse.

"His liability is also restricted to the amount of premium he pays," he said.

The Securities and Exchange Board of India has allowed domestic bourses to offer options trading in 31 select stocks from July 2 as a hedging tool to replace the carry-forward facility.

An option gives the buyer, or holder, the right but not the obligation to buy or sell securities at a certain price. The seller, or writer, of the option is obliged to take the other side of the trade. He receives a fee, or premium, from the option holder for doing so.

While the future belongs to the new trading system, several issues still need to be resolved, some analysts said.

"The minimum contract size is on the higher side and could be a hurdle initially," said Satish Menon, head of the western India operations of domestic brokerage Geojit Securities.

Sebi has required stock exchanges to have a minimum contract size of Rs 200,000 at the outset.

"The margin requirements should be lower if you want to encourage investors," added Ramesh Damani, a broker at the Bombay Stock Exchange, the country's oldest bourse.

But other analysts said the issue of margin moneys, payable by the option writer, would not be a hurdle as most of the contracts will be written by institutions.

"This is not a problem," said Ramachandran of Tata TD Waterhouse. "No investment bank or broker is going to hold back because of the margin requirements."

Safer, definite alternative

Most analysts, however, agreed that the inexperience of investors was the only major impediment in the way of options trading and said its benefits outweighed the costs.

"The option holder's downside is limited to the amount of premium which he pays upfront, compared to the carry-forward facility where the interest cost varies every week and is not known to the investor in advance," Geojit Securities' Menon said.

Carry-forward trading let traders carry over positions from one settlement period to the next by paying an interest charge, giving them more leeway to speculate on future price movements.

Though buyers of options are protected from unlimited losses, they are unlikely to make significant profits -- at least not in the early days, said another analyst.

"They (stock options) are inherently more dangerous than index options," said Deepak Jasani, a strategist with Kaji and Maulik, a local brokerage.

"Individual stock prices are more volatile than index movements and could result in investors losing the premium in most of the cases," he said.

YOU MAY ALSO WANT TO READ:
The Capital Markets Crisis
CSE bids farewell to badla

Tell us what you think of this report