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CALL OPTIONS BASICS


Breaking the Ice




The options market makes up for a significant part of the derivative market, particularly in India. I would not be exaggerating if I were to say that nearly 80% of the derivatives traded are options and the rest is attributable to the futures market. Internationally, the option market has been around for a while now, here is a quick background on the same –
  • Custom options were available as Over the Counter (OTC) since the 1920’s. These options were mainly on commodities
  • Options on equities began trading on the Chicago Board Options Exchange (CBOE) in 1972
  • Options on currencies and bonds began in late 1970s. These were again OTC trades
  • Exchange-traded options on currencies began on Philadelphia Stock Exchange in 1982
  • Interest rate options began trading on the CME in 1985
Clearly the international markets have evolved a great deal since the OTC days. However in India from the time of inception, the options market was facilitated by the exchanges. However options were available in the off market ‘Badla’ system. Think of the ‘badla system’ as a grey market for derivatives transactions. The badla system no longer exists, it has become obsolete. Here is a quick recap of the history of the Indian derivative markets –
  • June 12th 2000 – Index futures were launched
  • June 4th 2001 –Index options were launched
  • July 2nd 2001 – Stock options were launched
  • November 9th 2001 – Single stock futures were launched.
Though the options market has been around since 2001, the real liquidity in the Indian index options was seen only in 2006! I remember trading options around that time, the spreads were high and getting fills was a big deal. However in 2006, the Ambani brothers formally split up and their respective companies were listed as separate entities, thereby unlocking the value to the shareholders. In my opinion this particular corporate event triggered vibrancy in the Indian markets, creating some serious liquidity. However if you were to compare the liquidity in Indian stock options with the international markets, we still have a long way to catch up.

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