SEBI Proposes Converting ITM Stock Options into Futures Before Expiry
The Securities and Exchange Board of India (SEBI) has introduced a game-changing proposal to address the challenges associated with in-the-money (ITM) single stock options. Under this framework, SEBI plans to convert ITM options into futures contracts one day prior to expiry (E-1 day), aiming to reduce the risks linked with sudden price volatility and unexpected physical delivery obligations.
This proposal, outlined in a consultation paper released on December 5, 2024, invites public feedback until December 26, 2024.
Key Highlights of SEBI’s Proposal
Conversion to Futures on E-1 Day: ITM single stock options will automatically convert into futures contracts a day before expiry.
Flexibility to Close Positions: Traders can close their futures positions on the expiry day (E day) if they choose.
Physical Delivery for Open Positions: Any futures positions still open at the end of E day will be settled through physical delivery, following the current system.
Why Is This Change Necessary?
The current system, which mandates physical settlement for all ITM single stock options, has posed significant risks for traders:
1. Last-Minute Price Volatility: Sudden price swings can push out-of-the-money (OTM) options into the ITM category near the close of trading, leading to unexpected and large delivery obligations.
2. Risk of Losses and Defaults: Such unexpected shifts can expose traders to financial losses or even defaults, especially if they are unprepared for delivery requirements.
By converting ITM options into futures a day before expiry, SEBI aims to give traders more flexibility. Futures contracts can be closed out or adjusted without the immediate pressure of physical settlement, offering a safeguard against abrupt market movements.
Impact on Traders
This proposed mechanism could significantly benefit traders by:
Reducing the financial risks associated with unexpected delivery obligations.
Offering a buffer period to manage positions effectively.
Enhancing overall market stability during the high-volatility expiry phase.
Have Your Say
SEBI’s consultation paper is open for public feedback until December 26, 2024. If implemented, this framework could reshape the handling of single stock options in the Indian derivatives market.
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