The Securities and Exchange Board of India (SEBI) is evaluating a proposal to introduce a uniform framework for managing options strike prices, including the possibility of allowing exchanges to add new strikes during market hours, according to people aware of the discussions.
The move follows concerns around the way strike prices are currently introduced and managed, particularly during periods of sharp intraday price movement. The system is not always equipped to handle sudden price swings and the gap between available pre-defined strike prices and prevailing market prices may be too wide to allow efficient hedging. New strikes that are added are usually implemented with a lag.
A strike price is the fixed level at which an options contract can be exercised. The availability of a range of strikes and liquidity allows traders to take positions based on their market view or hedge existing exposures.
Uniform framework
The uniform framework may allow exchanges to introduce new strike prices during market hours, especially in the direction of sharp movements in the underlying asset. The idea is to not require any system modifications by brokers or market participants during live trading to avoid operational disruptions.
“Most of the time, especially around at-the-money (ATM) strikes, the market is fairly liquid and trades smoothly. But when the move is very sharp and sudden, prices can sometimes jump rather than move tick by tick,” said Feroze Azeez, Joint CEO at Anand Rathi Wealth.
“In those moments, you might see what traders casually call “phantom prices”, where the last traded price is visible, but execution at that exact level is not always possible,” he said.
During sharp intraday movements, trading interest typically shifts towards strike prices closer to the prevailing level of the underlying. However, the addition of such strikes may take time under existing mechanisms, even as a number of far-off strikes continue to remain listed, an exchange source said.
Strike prices
Market participants said that in most conditions, trading remains concentrated around actively used strike prices. “In such situations, if an out-of-the-money strike that fits the usual trading criterion is not available, traders typically shift to at-the-money or in-the-money options to ride the move,” said Anand James, Chief Market Strategist at Geojit Investments.
In fast markets, traders need to allow for some slippage or be ready to manage positions more actively rather than relying entirely on very tight stop losses.
At present, SEBI’s regulatory framework primarily covers long-dated index options, while other segments, including stock, currency and commodity options, follow exchange-specific practices, leading to differences in how strike prices are introduced and managed. An email sent to SEBI did not elicit a response.
While exchanges have their own rules for adding strike prices, the proposed framework will make it uniform across exchanges. It has been discussed with exchanges and intermediaries and will also be reviewed periodically through market participants, the source said.