Sebi Proposes Options-to-Futures Framework to Tackle ITM Stock Volatility

The Securities and Exchange Board of India (Sebi) is considering a new framework to mitigate risks associated with single stock option contracts that become 'In-The-Money' unexpectedly near expiry. This proposal involves converting ITM options into stock futures one day prior to expiry, aiming to ease settlement processes.

The Securities and Exchange Board of India (Sebi) is actively working on a framework to handle risks associated with single stock option contracts that unexpectedly become 'In-The-Money' (ITM) near their expiry. This is especially crucial in the derivatives market where physical settlement is essential.

Sebi has proposed that ITM options, instead of directly leading to a physical delivery obligation upon expiry, will initially transform into stock futures on the day before expiry, known as E-1 day. The futures positions can then be closed on the actual expiry day, allowing only futures to be traded on that day.

The change aims to mitigate potential risks associated with physical settlement requirements when options suddenly turn ITM due to unexpected price movements, thus ensuring smoother settlement processes. Public comments on this proposal are welcomed until December 26.

(With inputs from agencies.)