Improve options liquidity

SMARTSHARE

During the course of the trading on Wednesday, despite the benchmark indices treading water, at 2.05 pm around 15 stocks suddenly buzzed to life. These were the stocks which NSE had cleared for trading in the F&O segment from Friday, November 30.

This takes the list of stocks in the F&O segment from the current 207 to 222. The expanded list would impart liquidity to the markets. Some of the positions that are held in the cash market on borrowed money would be shifted to the F&O segment.

Even if the shares are held with one's own capital, the number of shares that can be bought in the derivatives can increase five times. Effectively, the market makers, traders, investors, brokers and even the exchequer, all tend to benefit from stocks entering the F&O segment.

Today, there are more stocks in the derivatives arena than there were during the times when the Badla system was in vogue.

Instead of a weekly carry-over, you now have a monthly carry-over and if you happen to transact in the far month, you have a virtual three-month free run. Barring the risk management, which is very robust today, the environment is more permissive.

While we have increased the number of stocks that are traded in the derivatives, we have not been able to bring about liquidity in the options trade. The volumes in the options as a percentage of stock derivatives is under 3 per cent.

The last time we did this check in the month of May, it was 5 per cent. One of the reason for the fall in the percentage is that new stocks keep on getting added and stock options don't take off. These 15 new stocks that have been added will further bring down the options to total open interest ratio.

Did we say new stocks? Things are in a state of pity even in the established stocks. Well sir, even in a Sensex and Nifty constituent like the HDFC Bank, there was no trade in options on November 29, the day the November series settled.

Now, here comes the revelation. In the entire November series, there was not even a single trade in the options in the second-largest private sector bank. There is obviously no trade in the December and the January series for the stock so far. 
 

OPTIONS TRADED IN NOVEMBER
	Company	Lots
1	HDFC BANK	0
2	HEROHONDA	0
3	SUNPHARMA	0
4	GRASIM	1
5	HDFC	2

And HDFC Bank is not alone with this dubious distinction. Giving it august company are Nifty mates Hero Honda and Sun Pharma. Grasim too would have been on the podium but for just one contract in the entire series. There were 28 companies that did not see even a single trade in the options in the November Series,

On the settlement day, even stocks that do not normally see trading can get traded. But on November 29, a third of the 207 stocks, 69 to be precise, did not have even a single options trade.

If the liquidity in options improves, it will make the markets less risky. Today, when someone wants to hedge his stock holding, the best and the appropriate way to do this is to buy a Put in the concerned stock. No matter, how many times you bang your head against the trading screen, you can't get an option at your price in most stocks.

One of the moves that the capital market regulator is contemplating, and may need parliamentary approval for, is changing the way in which the STT is charged on options trading. Trading in options could rise if the STT is charged only on the premium and not on the full amount.

But something that will help more than anything else will be the trimming of market lot size; that is also on the agenda. Why can't we have a standard market lot size of 100.

Surely, this would make the market lot bigger just for one company, Grasim. But for the rest of the 221 stocks in the arena, it will reduce the market lot size drastically, thereby facilitating liquidity.