Last month, SEBI approved the launch of a wide range of new derivative products aimed at increasing the market’s depth and providing investors a slew of riskreducing products that will help create a healthy and vibrant domestic market. The new products are based on the recommendations of a SEBI Committee on Derivatives headed by M. Rammohan Rao.Among the products mooted is mini-contracts on options, which will allow small investors to participate in the stock market. As of now, the size of an options contract is about Rs 2 lakh, but if that comes down to around Rs 50,000, it will allow small investors to hedge their positions in the market. Moreover, other investors will be able to hedge their positions more effectively up to the precise amount of exposure.
For example, an investor with a portfolio of Rs 3 lakh was able to cover only about two-thirds of his investments with options. With smaller contracts, an investor will now be able to hedge 100 per cent of his portfolio and, thus, have a perfect hedge.
On the anvil
New derivative products will give you a better handle on the markets.
Another key product SEBI has cleared is a volatility index, which will measure the implied volatility of both put and call options and calculate a value. A higher value will suggest more volatility, and, therefore, an increase in the options premiums. This suggests that the writer is unsure about the market and is, therefore, charging higher premiums.
Fund houses have welcomed the initiative. Says Sanjiv Shah, Executive Director, Benchmark Mutual Fund: “It’s a good move. It will help investors gauge the volatility of the market will be in the near future.” Another product likely to see the light of the day is options on futures, and it will help investors hedge their futures positions.
These products are still in the design stage and it could be a few months before they are ready for launch. Yet, all these new products will provide a wider range of risk mitigation products and create more activity in the Indian markets. The earlier they come, the better.