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Futures

SEBI: ITM Single-Stock Options to Devolve into Futures One Day Before Expiry

2024-12-05

On November 18, the regulator took a significant step by passing directions against three specific platforms. This move comes as part of the Securities and Exchange Board of India (SEBI)'s continuous efforts to ensure the stability and integrity of the financial markets. In a consultation paper released on December 5, SEBI proposed a novel approach to manage potential risks associated with single stock derivatives. The proposed change aims to mitigate the impact of sudden price movements near market close on expiry day.

SEBI's Initiative to Transform Single Stock-Option Contracts

Current Scenario and Proposed Changes

Currently, all in-the-money (ITM) options based on the last 30 mins VWAP on the expiry day are auto exercised and converted to underlying deliverable obligations. However, SEBI now proposes that ITM options will initially devolve into stock futures one day prior to expiry, i.e., E-1 day. This means that instead of directly resulting in physical delivery obligation on expiry, the positions will first transform into futures. On the expiry day, only futures will be tradeable, and the open futures positions will be settled by delivery as at present.For example, assume that the stock future contracts expire on the last Thursday of the month. On Wednesday, which is one working day prior to the expiry (E-1 day), all the open positions in option strikes that are ITM based on the last 30 minutes VWAP of the underlying stock will be auto exercised and will devolve into a futures position at the exercise price, set to expire on Thursday. The resultant positions in futures can be closed on Thursday, and the residual open positions will be settled via delivery.This mechanism is comparable to what is available in the commodity derivative segment and is designed to minimize system-level changes at market-infrastructure institutions (MIIs), trading members, and clearing members.

Impact on Option Positions

Upon exercise, option positions may devolve into futures in specific ways. Long ITM call positions may devolve into long positions in the underlying future contracts. Long ITM put positions may devolve into short positions in the underlying future contracts. Short ITM call positions may devolve into short positions in the underlying future contracts. And short ITM put positions may devolve into long positions in the underlying future contracts. All such devolved futures positions shall be opened at the strike price of the exercised options.This detailed approach ensures a clear and systematic transition of option positions to futures, providing market participants with a more predictable and manageable trading environment. It helps in reducing the potential risks associated with sudden price movements and physical settlement requirements, thereby enhancing the overall efficiency and stability of the single stock-option market.

In the current market scenario, stocks seem to be in a state of stagnation. This very situation is set to give bitcoin the opportunity to shine as it reaches a trading price of $102,800. One of the prominent headlines on CNBC is a note from Bernstein suggesting that bitcoin will surpass gold in the coming decade. Such a sentiment is likely to keep the bullish trend intact.

Bernstein's Bold Prediction

Analyst Gautam Chhugani wrote in a note on Thursday that "We expect Bitcoin to emerge as the new-age premier 'store of value' asset eventually replacing Gold over the next decade, and becoming a permanent part of institutional multi-asset allocation and a standard for corporate treasury management." This indicates a significant shift in the investment landscape.Bitcoin's potential to replace gold is a topic that has gained significant attention. It represents a new era in asset management and has the potential to revolutionize the way institutions and corporations view their treasury holdings. The fact that Bernstein has made this prediction adds credibility to the idea.In terms of equities, American Airlines shares have seen a remarkable 7.5% increase in the pre-market after boosting its profit outlook. Southwest Airlines shares are also up by 4% due to a better revenue forecast. These are clear signs of a healthy consumer market, which is likely to have a positive impact on the overall economy.The performance of these airline stocks highlights the importance of a strong consumer base. When consumers are confident and have disposable income, they are more likely to travel, which benefits airlines. This, in turn, can lead to increased profits and share prices.Bitcoin, on the other hand, offers a different investment opportunity. It is a decentralized digital currency that operates independently of traditional financial systems. This gives it certain advantages, such as lower transaction costs and greater accessibility.However, it is important to note that bitcoin is still a relatively new and volatile asset. Its price can fluctuate significantly in a short period of time. Investors need to be cautious and do their due diligence before investing in bitcoin.In conclusion, while stocks may be facing challenges at the moment, bitcoin is emerging as a potential alternative. The predictions from Bernstein and the performance of airline stocks suggest that there are opportunities in both traditional and new asset classes. Investors need to carefully consider their options and make informed decisions based on their risk tolerance and investment goals.

Bloomberg reports that CME Group Inc. is set to commence offering a one-ounce gold futures contract in January. This move comes in response to the soaring demand from retail investors during the bullion's record-breaking rally. The futures contract will be made available starting from January 13, subject to regulatory review. The Chicago-based exchange made this announcement on Thursday through a statement. CME's retail-friendly micro gold and micro silver futures, which are a fraction of the benchmark futures contracts, have been further enhanced with this new offering. These products have been among the fastest-growing metals offerings and have achieved record trading volumes this year.

Gold as a Popular Investment and Retail Interest Surge

Gold has long been a favored investment choice. In recent years, retail interest in gold has witnessed a significant upswing as more market participants recognize the importance of portfolio diversification. Jin Hennig, CME's global head of metals, emphasizes that one-ounce gold futures will open up more opportunities for a broader range of retail traders. The trend among retail investors to seek smaller-sized gold products as a means of diversifying their portfolios is on the rise, especially as spot gold has repeatedly hit new highs this year. The precious metal remains a reliable haven asset in times of economic and financial uncertainties.

Benefits of One-Ounce Gold Futures Contract

This new one-ounce gold futures contract offers several advantages. Firstly, it provides retail investors with a more accessible entry point into the gold market. With a smaller contract size, even those with limited funds can participate and gain exposure to gold. Secondly, it allows for greater flexibility in trading. Retail traders can adjust their positions more easily based on market conditions and their investment strategies. Moreover, it adds to the diversity of CME's metals offerings, catering to the evolving needs of retail investors. This contract enables them to build a more balanced portfolio by including gold as part of their investment mix.

Impact on the Gold Market and Retail Investors

The introduction of the one-ounce gold futures contract is likely to have a significant impact on the gold market. It is expected to attract more retail investors, further fueling the demand for gold. This increased demand can potentially lead to higher prices in the gold market, benefiting both existing and new investors. For retail investors, it offers a new tool for managing their portfolios and hedging against market risks. They can use this contract to speculate on the price movement of gold or to protect their existing gold holdings. Additionally, it provides a platform for retail traders to learn about and engage in the gold market, enhancing their financial literacy and investment skills.