Risk containment measures for Stock Option
Summary
This SEBI circular establishes risk containment measures for the introduction of exchange-traded stock option contracts in India. It mandates specific eligibility criteria for underlying stocks based on market capitalization, liquidity, and volatility metrics. The document outlines detailed margining requirements, position limits, and procedural guidelines for exchanges and clearing corporations.
Text
The Stock Option Contracts to be traded on the derivative exchange/segments shall have prior approval of SEBI. The Contract should comply with the disclosure requirements, if any, laid down by SEBI.
The Exchanges shall introduce Premium Settled American Style Stock Options, which shall be settled in cash at exercise, for an initial period of six months, thereafter, the Stock Options, at exercise, shall be settled by delivery.
The Stock Option Contract shall have a minimum contract size of Rs. 2 lakhs at the time of its introduction in the market.
The Stock Option contract shall have a maximum maturity of 12 months and shall have a minimum of 3 strikes (in the money, near the money and out of the money)
The Initial Margin requirements shall be based on worst case loss of a portfolio of an individual client to cover 99% VaR over a one day horizon. The Initial Margin requirement shall be netted at level of individual client and it shall be on gross basis at the level of Trading / Clearing Member.
The worst case loss of a portfolio would be calculated by valuing the portfolio under several scenarios... of changes in the Stock prices and changes in the volatility of the Stock. The price range for generating the scenarios for Stock Option Contracts would be three and a half standard deviation (3.5 Sigma).
A Short Option Minimum Margin equal to 7.5 % of the Notional Value based on the previous days closing value of the underlying stock, of all short stock options shall be charged if sum of the Worst Scenario Loss is lower than the Short Option Minimum Margin for the given underlying.
The Net Option Value shall be calculated as the current market value of the option times the number of options... This Net Option Value shall be added to the Liquid Net Worth of the clearing member.
For the Stock Option positions, the premium shall be paid in by the buyers in cash and paid out to the sellers in cash on T+1 day.
The notional value of gross open positions at any point in time for Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 times the liquid networth of a member, and in case of Stock Option Contracts, the notional value of gross short open position at any point in time shall not exceed 20 times the liquid networth of a member.
The market wide limit of open positions (in terms of the number of underlying stock) on an option on a particular stock shall be lesser of – 20 times the average number of shares traded daily... or 10% of the number of shares held by non-promoters i.e. 10% of the free float.
The stock should be amongst the of top 200 scrips, on the basis of average market capitalisation during the last six months and the average free float market capitalisation should not be less than Rs.750 Crores.
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Source: SecMarx — Risk containment measures for Stock Option. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.