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European Option

European Option

The Securities and Exchange Board of India has now allowed the bourses to introduce the European style of trading stock options.

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Namrata Dadwal
  • Dec 24, 2010,
  • Updated Dec 28, 2010 12:03 PM IST
The Securities and Exchange Board of India (Sebi) has now allowed the bourses to introduce the European style of trading stock options. Till now, only the American style was being used at the exchanges.Under the current style, a buyer can exercise the contract at any time during its tenure. However, in the European stock option, a buyer can do so only on the expiry day.As the exercise date is limited in the European option, it removes the uncertainty about possible early execution. The lack of this uncertainty is expected to encourage more investors to trade stock options. This also makes the pricing and valuation simpler than that of the American option. While the ability to execute an American option at any time during the contract makes it more flexible, it also renders it more expensive.Investors may not have the freedom to choose between these two styles as Sebi has asked the stock exchanges to opt for only one of these. Once they have chosen an option, they will not be able to switch to the other without the approval from Sebi.
QUOTES

"The equity markets are close to their peaks, so book partial profits in stocks and invest the money in fixed deposits. The rising interest rates have made these attractive."Anil RegoCEO and Founder, Right Horizons

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"The quarterly results provide a strong indication of a shift in the growth trajectory from 20-25% to 30% and hint at a stabilising supply-side scenario."Ashish ChopraResearch Analyst, Motilal Oswal

"Currently, investors can consider stocks of companies in highgrowth sectors, such as banking, infrastructure, capital goods and IT, where several firms are still available at reasonable valuations."Lalit ThakkarMD (Institution), Angel Broking
"Instead of being in a hurry to prepay a loan, it's better to keep paying the EMIs and invest the extra money in equity SIPs."P.V. SubramanyamFinancial Trainer, Iris

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The Securities and Exchange Board of India (Sebi) has now allowed the bourses to introduce the European style of trading stock options. Till now, only the American style was being used at the exchanges.Under the current style, a buyer can exercise the contract at any time during its tenure. However, in the European stock option, a buyer can do so only on the expiry day.As the exercise date is limited in the European option, it removes the uncertainty about possible early execution. The lack of this uncertainty is expected to encourage more investors to trade stock options. This also makes the pricing and valuation simpler than that of the American option. While the ability to execute an American option at any time during the contract makes it more flexible, it also renders it more expensive.Investors may not have the freedom to choose between these two styles as Sebi has asked the stock exchanges to opt for only one of these. Once they have chosen an option, they will not be able to switch to the other without the approval from Sebi.
QUOTES

"The equity markets are close to their peaks, so book partial profits in stocks and invest the money in fixed deposits. The rising interest rates have made these attractive."Anil RegoCEO and Founder, Right Horizons

Advertisement

Related Articles

"The quarterly results provide a strong indication of a shift in the growth trajectory from 20-25% to 30% and hint at a stabilising supply-side scenario."Ashish ChopraResearch Analyst, Motilal Oswal

"Currently, investors can consider stocks of companies in highgrowth sectors, such as banking, infrastructure, capital goods and IT, where several firms are still available at reasonable valuations."Lalit ThakkarMD (Institution), Angel Broking
"Instead of being in a hurry to prepay a loan, it's better to keep paying the EMIs and invest the extra money in equity SIPs."P.V. SubramanyamFinancial Trainer, Iris

ALSO READ:

Worth the weight?

Smooth way to pay

Realty check

Optimistic Indians

Protected Benefits

Growth Plan

Regulator Watch

Read more!

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