In a move that is expected to improve liquidity and boost volumes in stock options trade, capital markets regulator Securities and Exchange Board of India (SEBI) has allowed stock exchanges the flexibility to offer either European-style or American-style contracts. At present, only American-style contracts are allowed in stock options.
Under the American style, options can be exercised (ie, the contract terminated) during any time of the contract's tenure, while in the European style, a buyer can exercise the contract only on the expiry day. European stock options eliminate the uncertainty an options seller faces in American contracts.
In a circular issued on Wednesday, SEBI said after opting for a particular style, a stock exchange shall offer options contracts of the same style on all eligible stocks.
While options are quite popular with the investor community due to limited downside, stock options have lagged in the Indian equity derivatives space.
Stock options contribute about 3 per cent to the total number of equity derivatives contracts on NSE. Index options contribute over 59 per cent. In September, the stock options turnover was around Rs1.09 lakh crore – the lowest when compared to stock futures, index futures and index options.
Market participants attribute this to a large number of illiquid stocks. With European-style stock options, there's a likelihood of more players entering the space, they say.