volatility based strike prices on NSE

volatility based strike prices are introduced on National Stock Exchange of India with effect from 01 Apr 2013.  At present strikes are introduced on stock futures based on the last traded price of the underlying security. Both out of the money and In the money strikes are introduced based on the stock price.  Strike prices varies between 2.5 rupees for securities less than 50 rupees and 50 rupees for securities valued more than 1000 rupees.  The table below shows how underlying prices of stock futures are used in the calculation before volatility based strike prices.

Strike interval before volatility based strike prices scheme on

                volatility based strike prices on nse

Underlying Closing PriceStrike IntervalNo. of Strikes ITM-ATM-OTMNo. of additional strikes which may be enabled intra day in either direction
Less than or equal to Rs.50

2.5

5-1-5

5

> Rs.50 to ≤ Rs.100

5

5-1-5

5

> Rs.100 to ≤ Rs.250

10

5-1-5

5

> Rs.250 to ≤ Rs.500

20

5-1-5

5

> Rs.500 to ≤ Rs.1000

20

10-1-10

10

> Rs.1000

50

10-1-10

10

NEED FOR CHANGE IN OPTION STRIKE PRICES ON NSE

The problem with value based strike prices is low liquidity in volatile stocks and huge gap in high volatile stocks.  As volatile stocks move far away in one direction the difference between Deep In the Money and Deep Out of The Money strikes increases.  The move by National Stock Exchange of India to introduce strike option prices on stock options rather than based on the value of the stock is a good move in right direction.  volatility based strike prices will help to introduce options with low strike interval in low volatility stocks and high strike interval in high volatile stocks.  For example if stock moves only 2 rupees in a month, the interval will be less. If same stock moves 10 rupees next month the interval will be higher in the new contracts to be introduced after expiry of near month contract.  Stocks and Strike scheme list will be issued separately by National Stock Exchange later.

The number of strikes on call and put option for each underlying shall be a minimum of 5-1-5 and be a  maximum of 10-1-10 strikes. NSE has the option to introduce additional strikes  intra day, if required.  Step value interval of stocks will be reviewed quarterly and revised if necessary.  It indicates volatility will be calculated once a quarter for this purpose and changes made accordingly.

National Stock Exchanges decides  At The Money (ATM) strike price by rounding off the underlying closing value to nearest strike interval price. In other words ATM can be defined as a strike price whether the buyer of option neither gets profit nor loss.  ITM (In the Money options) give the buyer of the option net positive cash flow.  OTM (Out of The Money) options does not give any money if exercised by option buyer. Options in India are settled in European style and can be exercised only on the expiry day.  Expiry day for futures and options on National Stock Exchange is last Thursday of every calender month. There will not be any change in settlement and exercise after introduction of volatility based strike prices scheme.

Please read NSE Circular NSE/FAOP/22901 dated 07 Mar 2013 on volatility based strike prices with subject Revision in Scheme of Strikes in Stock Options.

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