Contract Specifications for soon to be introduced BSE Sensex Options product

As per the proposed contract specifications, BSE would launch it's first index option derivatives product with BSE 30 SENSEX as underlying. The SENSEX Options would be premium style, which means that the buyer of the option would pay premium to the seller of the option in cash at the time of entering into the transaction. The SENSEX Options would be European Style, which means that buyer (holders) of the options would be able to exercise their options contract only at the expiry of the contract. The expiry of the contract would be on last Thursday of the contract month. There would be call and put options contract with one, two and three month maturity.

There would be at least two In-the-Money, two Out-of-the-Money and one Near-the-Money options contract tradable at any time. This typically means that at SENSEX level of 3700, contracts available for trading would be with strike prices 3900, 3800, 3700, 3600 and 3500. As the SENSEX crosses 3800 or 3600 the new contracts with strike prices 4000 and 3400 respectively would be introduced for trading. This way as the SENSEX moves up or down new contracts would be introduced for trading. Once introduced, a contract is not withdrawn from trading.

The market participants would quote the price of the SENSEX Options that is premium in terms of SENSEX points. For example, if SENSEX = 3700, Interest Rate = 10%, Volatility = 30%, Time to Maturity = 30 days then for a call option contract with 3600 strike, the premium would be about 200 SENSEX points. In money terms this premium would be INR 10,000 (200*50).

The tick size of 0.1 means that minimum difference between bid and offer at any time can be 0.1 SENSEX points that is INR 5 (0.1*50).The settlement value of the SENSEX options would be the closing price of the SENSEX on the expiry day that is the last Thursday of the contract month. Extending our example, if the value of closing SENSEX on the last Thursday is 4000, then the buyer (holder) of the option would exercise his options contract as his option is in the money. Then the seller (writer) of this option contract against whom this exercise is assigned, would be obliged to pay INR 20,000 (difference between settlement value and strike 400*50) to the buyer. This interprets that the settlement of the SENSEX options contract would be on cash basis.

The Proposed Contract Specifications for SENSEX Options are as given below:

Dr. Sanjiv Mehta
CEO
Derivatives Segment

May 22, 2001