I was just wondering…..Currently there is so much volatility in all markets,be it Equity or Commodities…due to earnings uncertainties,anxieties about health of global economy and Financial Systems
Most Experts are advising to think Long Term…Naturally…3 Years + atleast
Then why is it that we have Derivative Contracts structured only for a maximum of Three Months… for Long Term,we need to roll them over and over and over and over again ?
It’s time that we introduce Long Term Option Contracts…This will enable me to take a call on the Markets or a particular Stock or Commodity for a period of One Year and more by investing merely a fraction of what I would have to now in Spot
For example If I felt the Markets would improve in the next two years,I could buy a Nifty Call at Strike price of 2750 (Current Level) that expires in 2011 at a Premium of ,let’s say,Rs 225…Assuming Contract lot is 50,the contract Value is Rs 137500 and I would have to pay Rs 11250 as premium…That is my Cost….I now have the right,but no obligation, to exercise this Call
So if ,let’s say,Nifty moves up and is at 4000,somewhere in mid 2010,I can square of my contract and sell the Call,at a premium of let’s say,Rs 1025 and profit by Rs 800 which aggregates to Rs 40000 on the contract…a return of 356 % in a year or so !
The above is a hypothetical example and it can be argued that Option Premiums may quote at much higher % levels in this volatility…The Nifty Call of Strike 2750 may not be quoted at 225…but more at 500 perhaps or even more !…that’s an 18% premium !
Chicago Board Options Exchange (CBOE) has a registered product on these lines and they have trademarked it as LEAPS.It stands for Long Term Equity Anticipation Securities…This product is available in the form of Calls and Puts for 450 common stocks and Ten Indices and the Expiration Date can extend upto 39 months…In fact CBOE even has the VIX or the Volatility Index Options which is the market estimate of expected volatility and is which is computed from realtime S & P 500 Index Option Bid/Ask quotes
I believe the SEBI Advisory Committee for Derivatives has already suggested the introduction of Long Term Derivative Contracts…Why the delay in the Suggestion being adopted for Implementation ? The Operations Framework by Exchanges is already in place for Futures and Options so this should facilitate the Introduction of Long Term Expiration Contracts fairly easily