Futures & Options Segment
Futures & Options Segment
In the year 2008, NSE ranked as the eighth largest derivatives exchange in the world, the second largest exchange in terms of number of contracts traded in single stock futures and the third largest in terms number of contracts traded in the index futures category. The derivatives trading at NSE commenced on June 12, 2000 with futures trading on S&P CNX Nifty Index. Subsequently, the product base has been increased to include trading in options on S&P CNX Nifty Index, futures and options on CNX IT Index, Bank Nifty Index, CNX Nifty Junior, CNX 100, Nifty Midcap 50 Indices, S&P CNX Defty and 234 single stocks (Table 6-1) as of March 2009. The various products on the derivative segment of NSE and their date of launch is shown in the table below.
Products available for trading on Derivatives SegmentProducts on Derivative Segment S&P CNX Nifty Futures S&P CNX Nifty Options Single Stock Options Single Stock Futures Interest Rate Futures CNX IT Futures & Options Bank Nifty Futures & Options CNX Nifty Junior Futures & Options CNX 100 Futures & Options Nifty Midcap 50 Futures & Options Mini Nifty Futures & Options on S&P CNX Nifty Long term Options on S&P CNX Nifty S&P CNX Defty Futures and Options Date of Launch June 12, 2000 June 4, 2001 July 2, 2001 November 9, 2001 June 24, 2003 August 29, 2003 June 13, 2005 June 1, 2007 June 1, 2007 October 5, 2007 January 1, 2008 March 3, 2008 December 10, 2008
Number of Securities on which F&O Contracts were available for Trading (2008-09)Month/Year Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 2008-09 * at the end of the month Number of Securities* 227 230 229 230 266 267 267 265 263 259 255 234 234
Trading on single stock options commenced on July 2, 2001 while single stock futures were launched on November 9, 2001. Since inception, NSE established itself as the sole market leader in this segment in the country and during 2008-09, it accounted for 99 % of the market share.
Trading MechanismThe derivatives trading system at NSE is called NEAT-F&O trading system. It provides a fully automated screen-based trading for all kind of derivative products available on NSE on a nationwide basis. It supports an anonymous order driven market, which operates on a strict price/time priority. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. Various time and price related conditions like Immediate or Cancel, Limit/Market Price, Stop Loss, etc. can be built into an order. Trading in derivatives is essentially similar to that of trading of securities in the CM segment. The NEAT-F&O trading system distinctly identifies two groups of users. The trading user more popularly known as trading member has access to functions such as, order entry, order matching and order & trade management. The clearing user (clearing member) uses the trader workstation for the purpose of monitoring the trading member(s) for whom he clears the trades. Additionally, he can enter and set limits on positions, which a trading member can take.
Contract SpecificationThe contract specification for derivative products traded on NSE are summarised in Table 6-2 & Table 6-3. The index futures and index options contracts traded on NSE are based on S&P CNX Nifty Index, CNX IT Index, Bank Nifty, CNX Nifty Junior, CNX 100, Nifty Midcap 50 and S&P CNX Defty while stock futures and options are based on individual securities. Mini futures and options contracts and long term options contracts are also available on S&P CNX Nifty. Stock futures and options were available on 234 securities as of March 2009. At any point of time there are only three contract months available for trading, with 1 month, 2 months and 3 months to expiry. These contracts expire on last Thursday of the expiry month and have a maximum of 3-month expiration cycle. If the last Thursday is a trading holiday, the contracts expire on the previous trading day. A new contract is introduced on the next trading day following the expiry of the near month contract. All the derivatives contracts are presently cash settled.
The long term option contracts are available for 3 serial month contracts, 3 quarterly months of the cycle March / June / September / December and 5 following semiannual months of the cycle June / December. Thus, at any point in time there are atleast 3 year tenure option available. Introduction of strike prices for option contracts Stock Options NSE introduces option strikes on a daily basis based on the price of the underlying. With regard to options on stocks the Exchange provides a minimum of seven strike prices for every option type (i.e Call & Put) during the trading month. At any time, there are atleast three strikes in-the-money (ITM), three strikes out-of-the-money (OTM) and one strike at-the-money (ATM). The table below gives details of generation of strike price interval for stock options.
Generation of strikes for Stock OptionsPrice of underlying Less than or equal to Rs.50 > Rs.50 - Rs.250 > Rs.250 - Rs. 500 > Rs.500 - Rs.1000 > Rs.1000 - Rs.2500 > Rs.2500 Strike Price Interval 2.5 5 10 20 30 50 Schemes of Strikes 3-1-3 3-1-3 3-1-3 3-1-3 3-1-3 3-1-3
Index Options The number of strikes provided in options on Indices- S&P CNX Nifty, CNX Nifty Junior, CNX 100, CNX IT, Bank Nifty Nifty Midcap 50 and S&P CNX Defty are related to the range in which previous days closing value of the index falls as per the table below.
Generation of strikes for Index OptionsIndex Level From To Revised Strike Interval Revised number of strikes In the money-At the money-Out of the money 4-1-4 6-1-6 6-1-6 7-1-7
Upto 2000 2001 to 4000 4001 to 6000 > 6000
2.5 5 10 20
Selection Criteria for Stocks and Index eligibility for tradingEligibility Criteria of Stocks The eligibility criteria for inclusion of scrips in F&O segment is as under: The stock is chosen from amongst the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis. The stocks median quarter sigma order size over the last six months should not be less than Rs. 5 lakh. The market wide position limit (MWPL) in the stock should not be less than Rs. 100 crore.
The criteria for exclusion of scrips in F&O segment will be as under: For an existing F&O stock, the continued eligibility criteria is that market wide position limit in the stock should not be less than Rs. 60 crores and stocks median quarter-sigma order size over the last six months shall be not less than Rs. 2 lakh. The stock is excluded if the above criteria is not fulfilled for consecutively three months. Further, once the stock is excluded from the F&O list, it is not considered for reinclusion for a period of one year. Eligibility Criteria of Indices The Exchange may consider introducing derivative contracts on an index if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading. However, no single ineligible stocks in the index should have a weightage of more than 5% in the index. The above criteria is applied every month, if the index fails to meet the eligibility criteria for three months consecutively, then no fresh month contract are issued on that index. However, the existing unexpired contacts are permitted to trade till expiry and new strikes may also be introduced in the existing contracts.
Re-introduction of dropped stocks A stock which is dropped from derivatives trading may become eligible once again. In such instances, the stock is required to fulfill the eligibility criteria for three consecutive months to be re-introduced for derivatives trading. Eligibility criteria of stocks for derivatives trading especially on account of corporate restructuring The eligibility criteria for stocks for derivatives trading on account of corporate
restructuring is as under. All the following conditions should be met in the case of shares of a company undergoing restructuring through any means for eligibility to reintroduce derivative contracts on that company from the first day of listing of the post restructured company/(s) (as the case may be) stock (herein referred to as post restructured company) in the underlying market. a) The Futures and options contracts on the stock of the original (pre restructure) company were traded on any exchange prior to its restructuring; The pre restructured company had a market capitalisation of at least Rs.1000 crores prior to its restructuring; The post restructured company would be treated like a new stock and if it is, in the opinion of the exchange, likely to be at least one-third the size of the pre restructuring company in terms of revenues, or assets, or (where appropriate) analyst valuations; and In the opinion of the exchange, the scheme of restructuring does not suggest that the post restructured company would have any characteristic (for example extremely low free float) that would render the company ineligible for derivatives trading.
If the above conditions are satisfied, then the exchange takes the following course of action in dealing with the existing derivative contracts on the pre-restructured company and introduction of fresh contracts on the post restructured company a) In the contract month in which the post restructured company begins to trade, the Exchange introduce near month, middle month and far month derivative contracts on the stock of the restructured company. In subsequent contract months, the normal rules for entry and e