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NSE to launch European style stock option contracts

BS Reporter  |  Mumbai 

The National Stock Exchange (NSE) has decided to switch to European style stock option for all contracts expiring on January 27, 2011 and onwards.

The decision comes close on the heels of the market regulator giving exchanges the flexibility to offer either European style or American style stock options contracts.

"All stock options contracts expiring on January 27, 2011 and onwards shall have European exercise style only," said a NSE circular. "Accordingly there shall be no interim exercise available for all stock options contracts expiring on January 27, 2011 and onwards and all the in-the-money stock options contracts shall get automatically exercised on the expiry day," it added.

The circular further added that all existing month stock options contracts expiring on November 25, 2010 and December 30, 2010 shall continue to have American exercise style.

Market participants are of the view this move is expected to improve liquidity in the stock options arena.

A European option is one that can be squared off only on the day of expiry (maturity).

This is in sharp contrast to an American option that can be squared off even before expiry.

While options are quite popular with the investor community due to its limited downside, stock options have proved to be a laggard in the Indian equity derivatives space.

Early this week, the Securities and Exchange Board of India (Sebi) gave its go-ahead for introduction of European style option contracts after discussing the matter with the stock exchanges.

Currently, only the American style contracts are allowed in the stock options segment.

"In consultation with stock exchanges, it has been decided to provide flexibility to stock exchanges to offer either European style or American style stock options," said the Sebi circular issued on Wednesday.

After opting for a particular style of exercise, a stock exchange shall offer option contracts of the same style on all eligible stocks. it added.

In September 2010, the total monthly stock options turnover was around Rs 1.09 lakh crore, the lowest when compared to stock futures, index futures and index options.

Market participants attribute the low volumes to the presence of a large number of illiquid stocks.

With the introduction of European style stock options, however, there is a likelihood that more players would enter the space, they say.

Meanwhile, if a stock exchange wants to switch back to American style contracts, it can do so after getting the necessary approvals from the market regulator.

"After opting for a particular style of exercise, a stock exchange may change to another style of exercise only after seeking prior approval of Sebi," said the Sebi circular.

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First Published: Fri, October 29 2010. 15:42 IST