Index Options
Options contract give its holder the right, but not the obligation, to buy or sell something
on or before a specified date at a stated price. Generally, index options are European
style, being those option contracts that can be exercised only on the expiration date. The
underlying indices for index options are the various eligible indices as permitted by
SEBI.
SEBI, vide its circular SEBI/DNPD/Cir-34/2008 dated January 11, 2008, had announced
the introduction of Index Options with a longer tenure. BSE introduced 'Long Dated
Options' on its flagship index - Sensex® -on February 29, 2008, whereby the Members
can trade in Sensex (in the normal lot of 15 only and not 'mini' Sensex) Options contracts
with an expiry of up to 3 years.
• Later expiration dates offer an opportunity for long term investors to take a view
on prolonged price changes without requiring to use a combination of short term
option contracts.
• Premia for long-term options tend to be higher than that of short term options
because the increased expiration period means increased possibility of larger
movement in the price of the underlying.
• Long-term high net worth investors and institutions need not be burdened with the
cost of rolling over the options purchased to protect their portfolios from
downside risks.
• LDOs offer a good alternative to a long-term trader to gain exposure to a
prolonged period in a given security without having to roll several short term
contracts
Following new options series are available for the Sensex (normal lot of 15) Options
contracts are:
• Along with the existing 3 monthly rolling contracts, three additional 3 fixed
quarterly months of the cycle Mar/Jun/Sep/Dec would be available.
• Further, 5 additional semi-annual months of the cycle Jun/Dec would be
available, so that at any point in time there would be options contract with up to 3
years tenure available.
All risk management measures and contract specifications (except for the longer expiries)
for normal monthly contracts would also apply to the Long Dated Options contracts.