MUMBAI: In a move aimed at improving hedging efficiency and reducing disruptions during volatile trading sessions, particularly in the rapidly expanding index options market, the market regulator Securities Exchange Board of India (Sebi) has proposed to allow exchanges a flexible and standardised framework to introduce and manage strike prices in options contracts during trading. The proposal aims to improve trading continuity during periods of sharp market volatility and enhance ease of doing business in the derivatives segment, Sebi said a in a consultation paper on Monday.
Under the proposed framework, all exchanges will be required to establish comprehensive rules governing the creation and management of options contracts, which would include maintaining a minimum number of in-the-money (ITM) and out-of-the-money (OTM) strike prices, conducting daily reviews of strike availability, and eliminating contracts that are far removed from prevailing market prices.
“The proposed framework shall have a provision to introduce new strike prices (options contracts) intraday during market hours, in the direction of price movement in the underlying,” the paper said.
A key feature is the proposal to have mandatory intraday introduction of new strike prices aligned with market movement. According to Sebi, exchanges should be able to add new option contracts during trading hours without requiring brokers or market participants to change their systems during live market.
The Sebi paper seeks public feedback on measures that would require exchanges to maintain adequate availability of option strike prices around prevailing market levels. The regulator noted that during significant intraday market swings, traders may face difficulties if price movements extend beyond the farthest available strike prices.
A strike price is the fixed level at which traders can buy or sell an underlying asset, such as a stock or index, in an options contract. Traders rely on a range of strike prices to take positions based on their market outlook or to hedge existing exposures. The availability and relevance of these strike prices are critical for efficient trading.