THE STOCK EXCHANGE, MUMBAI, (BSE), LAUNCHES TRADING IN OPTIONS ON INDIVIDUAL STOCKS

In line with its commitment to bring new financial products at the doorsteps of investors, the Exchange launched first exchange traded equity derivatives instruments in the Indian capital markets, the Sensex Futures on 9th June, 2000 & Options on BSE 30 Sensex, on 1st June, 2001. The decision of SEBI board taken on 14th May, 2001, changed the face of Indian Capital markets when it announced the end of all deferral products of the cash segment like Badla, ALBM, BLESS, MCFS, CNS etc with effect from 2nd July, 2001. The decision has paved way for the introduction of numerous derivative products to bring the Indian markets in line with International financial markets. Products of cash market like Badla/ ALBM already had a derivative element in them, and hence moving to full fledged derivative instruments like options on individual stocks, is a natural progression for Indian capital markets. The Stock Exchange, Mumbai, is pleased to announce the successful launch of Options on Individual Stocks on Monday, 9th July, 2001.

The Executive Director of the Exchange, Shri A. N. Joshi, who is also the Chairman of BSE Governing Council, inaugurated trading in options on individual stocks. The first trade was done by Advani Share Brokers Pvt. Ltd. (Options Writer) & K R Choksey (Options Buyer), for 1 July Call Option on ACC at the strike of Rs. 140 (ACCCJUL00140) for a premium of Rs. 3.00. BSE has introduced American style cash settled options on 31 stocks approved by SEBI.

According to Dr. Sanjiv Mehta, CEO, BSE Derivatives Segment, "Now we have a critical mass of derivative products, attracting higher attention from the market participants. For various investor segments, the number of tools available to express their customized views and satisfy their specific hedging needs, have gone up manifold".

Options on 31 scrips, being introduced by BSE Derivatives Segment are premium style, American options where the options contracts can be exercised on a daily basis during the exercise session held by the Exchange between 4.00 to 4.45 p.m. Call & Put Options on individual stocks are available with one, two & three month maturity e.g., in the month of July, options contracts maturing in the months of July, August & September, will be available for trading. A contract expires on the last Thursday of the contract month e.g.; July options contracts on Individual stocks would expire on the last Thursday of July which is 26^th July, 2001.

The contract specifications of Stock Options are as under:

We can understand better with the help of an example. Let us say that the current (spot) price of Reliance is Rs. 320/- . An investor today (9th July, 2001), wants to buy a call (right to buy) on Reliance. At the spot price of Rs. 320/- there would be atleast 5 strikes available for trading lets say Rs. 320 (at the money), Rs. 340, Rs. 360 (Out of the money) & Rs. 300, 280 (In the money). Lets say the investor decides to buy 1 at the money call option on Reliance with strike of Rs. 320/- ( RILCJUL0320). This would amount to buying rights to buy 600 shares of Reliance (contract multiplier of Reliance is 600). With annualized volatility of Reliance being approximately 35%, 10% as the rate of interest & 15 days to expiry (26th July being the last Thursday of July when July contract would expire), the premium works out to be approx. Rs. 10 per share. Thus the total call premium would be (600 shares of Reliance X Rs. 10 per share) = Rs. 6000/-.

By buying the above mentioned contract, the investor has the right to buy Reliance at Rs. 320/- upto the expiry day: 26th July, 2001. Every day the closing value of Reliance will be calculated in the cash segment as per the algorithm explained above in contract specifications. If Reliance price crosses Rs. 320 anytime during the period of the contract, the call could be exercised in the exercise session held daily (being American). The investor could also wait till the day of expiry when all in-the money options by certain specified ticks would deemed to be exercised unless the investor communicates otherwise. On exercise the investor would receive the difference between the settlement price (Closing value of Reliance in BSE cash segment on day of exercise) & the strike price (being cash settled). In case till the day of expiry, the price of Reliance remains below the strike price, the investor would choose not to exercise the call & his loss would be restricted to Rs. 6000/- (the premium paid originally). The investor can also do a reverse trade (write a July call on Reliance with same strike) between the day of purchase & day of expiry of July series to close out/ square up his position.

The trading hours of Sensex Futures & Options and options on individual stocks, are from 9.30 a.m. to 3.30 p.m.

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Dr. Sanjiv Mehta
CEO Derivatives Segment
The Stock Exchange, Mumbai.