The equity derivatives market: The state of the art

Transcription

1 The equity derivatives market: The state of the art Susan Thomas August 11, 2001 Turnover Page 1 of 19

2 Goals Index futures Index options Stock options Turnover Page 2 of 19

3 1. Turnover Page 3 of 19

4 Index futures Data from Friday, 11 August Nifty close = (Rs. crore) Product NSE BSE August September October Total Comparison with spot market: Rank 8 (Infosys) was Rs.64 crore, and Rank 9 (NIIT) was Rs.54 crore. Turnover Page 4 of 19

5 Index futures volume 1000 NSE SGX BSE Turnover Trading volume (Rs. crore) Page 5 of 19 1 Jun 00 Jul 00 Aug 00 Sep 00 Oct 00 Nov 00 Dec 00 Jan 01 Feb 01 Mar 01 Apr 01 May 01 Jun 01

6 Index options Calls Turnover Puts Aug Sept Oct Aug Sept 0.04 Oct 0.04 Page 6 of 19 Total volume was Rs.8.3 crore.

7 Stock options Calls traded for 23 companies (107 products). Puts traded for 18 companies (58 products). Total volume was Rs.42.3 crore. Page 7 of 19

8 Comparing stock and index options Top 5 index options Top 5 stock options Product Turnover Nifty put, 1060, August 2.15 Nifty call, 1060, August 1.49 Nifty call, 1080, August 1.37 Nifty put, 1040, August 1.06 Nifty call, 1100, August 0.64 Product Turnover Reliance call, 280, August 3.63 Reliance call, 320, August 3.45 Reliance call, 300, August 3.13 Reliance call, 340, August 2.62 Reliance put, 320, August 2.24 The aggregate turnover of stock options is much higher than that of index options, but it s diffused over 28 stocks. Turnover Page 8 of 19

9 Number of trades NSE does roughly 4000 trades a day, i.e. roughly one trade each five seconds (on average). Page 9 of 19

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11 What we look for to talk about pricing Futures: the cost of carry. Options: implied volatility. Page 11 of 19

12 Index futures Broadly speaking, the interest rates are too low. Very often, all the rates from the three futures prices imply a negative basis. This suggests rampant opportunities for reverse cash and carry arbitrage. Page 12 of 19

13 Index options and stock options Stock options will always have higher implied volatilities as compared with index options (since index is diversified). Page 13 of 19

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15 Measuring liquidity Market impact cost is the best way to measure liquidity (i.e. the cost of transacting). Owing to SEBI regulations, the market lot for all the derivative products is roughly Rs.200,000. Hence, the bid offer spread we see on the screen is directly comparable across all these products. Page 15 of 19

16 Index futures The finest bid offer spreads amongst all equity derivatives are found on index futures. When Nifty is at 1060, a basis point is 11 paisa. The near month contract often shows spreads as fine as Rs This is a more liquid index proxy as compared with the spot market! The bid-offer spread is wider for 2 month and 3 month products. Page 16 of 19

17 Index options Broadly speaking, the spreads are much wider than those seen with the index futures. The near-month ATM calls and puts are the most liquid, but the spread is still around 10%. Both bid and offer are found for roughly 22 of the 35 options traded. Page 17 of 19

18 Stock options Typically, stock options will always have higher impact cost as compared with index options (since index has less asymmetric information). Roughly 1000 options are traded, most of them don t have both bid and offer. When bid and offer are both observed, the spread is very wide. Page 18 of 19

19 Finding out more Ajay Shah and Susan Thomas. Derivatives in India: Frequently asked questions. (June 2000) Page 19 of 19