Novel F&O products soon

Sebi has set the ball rolling by setting up a panel.

A slew of derivative products aimed at helping investors bet on specific sectors and take a long-term directional call on markets will debut during the year.

One of the most interesting products, which is a clear front-runner for an India debut, is LEAPS (Long-Term Equity Anticipation Securities), market sources said. This is an ideal instrument for investors to make a long-term option investment, they said. The contract duration would be six months to a year.

The Securities and Exchange Board of India, at its board meeting on Saturday, set the ball rolling for this by deciding to set up a committee to look into the introduction of more derivatives products.

In addition to the introduction of long-run products, the F&O segment, almost monopolised by the National Stock Exchange (NSE), is also tipped to witness more index-based derivatives or exchange-traded funds (ETFs).

LEAPS are traded like normal options but allow investors to benefit from the appreciation of equities while placing a lot less money at risk than is required to purchase stocks, said analysts.

Currently, only three-month options contracts are available and only near-month contracts are active. Sources believe the introduction of six-month or one-year products will act as a booster for the second- and far-month contracts as well.

NSE Managing Director and CEO Ravi Narain, at a recent meeting of exchange members, gave enough hints on what to expect from the exchange in the coming months.

"We will see the introduction of longer-dated contracts in 2007," he said. Analysts expect foreign institutional investors, known to do equity-swaps for long-term maturity, will be able to place a long-term call on the country's markets.

"If investors want to take a one-year view on the market, the only option now available to go for is three-month contracts and roll them before expiry. So, the introduction of LEAPS will help," Alex Mathews, head of research at Geojit Financial Services.

The other products on the anvil are sectoral derivatives. The NSE is understood to be weighing introduction of index-based ETFs or derivatives products based on its NSE IT, Bank Nifty (ETF is already available through Benchmark's Bank BeES), Nifty Junior indices.

"We will consider launching more products based on our other indices," said a senior NSE official.Physical delivery in options, which is expected to boost the now illiquid options market, is also expected to be introduced in the near future.