The Securities and Exchange Board of India on Friday gave its go-ahead for the launch of long duration options on the popular Sensex and Nifty indices, with tenures up to three years.
The move is aimed at helping investors to hedge their positions in the market for three years compared to the existing three-month duration.
The decision is based on the recommendations of Sebi's Derivatives Market Review Committee headed by Prof M Rammohan Rao.
The product will be available with immediate effect, according to a Sebi circular in Mumbai. Analysts expect foreign and domestic institutions to be active players in the longterm options.
"Foreign institutional investors are already big players in the long duration derivatives products in the offshore market. This market will now shift to the Indian exchanges," said Rajesh Baheti of Crosseas Capital Services.
At the moment, there are only one-month, two-month and three-month contracts available for investors in the Indian stock exchanges.
Due to this, investors who have a long-term view on the market do not find direct options product with, which this could be achieved. By rolling over the contracts at the end of every month, the cost of carry was rising for those who had a long-term view.
Following the introduction of longer duration products for up to three years, the cost of carry will come down, reckon analysts. Sebi said the three-month contracts would continue to exist.
In addition, three quarterly months' of cycle (January-March, April-June, July-September and October-November) would be available for investors.
Also, five semi-annual months of cycle (January-June and July-December) would be available. "So at any point in time, there would be options contract with at least three-year tenure will be available for investors," said the Sebi circular.
"Even mutual funds, which have three-year close-ended schemes, can now hedge their investments through this 3-year index options. The product was long overdue," said Baheti. "But, I don't think, retail investors will have any interest in long-duration product," he added.
The regulator said the risk containment and other measures applicable for the existing exchange-traded equity index option contracts will be extended suitable to long-term options contracts on index.
Longer term options offer a good alternative to a longer-term trader to gain exposure to a prolonged period in a given security without having to roll several short-term contracts.
"These longer term options contracts will provide liquidity across the tenures in the market," said Sebi, in a note on longer term options.
