The Indian capital market is evolving rapidly, and regulators are now focusing not only on increasing trading volumes but also on making the trading experience more efficient and stable. In this direction, SEBI’s new proposal is being seen as an important step for options trading.
During periods of sharp intraday volatility, existing strike prices often move far away from the market’s actual movement. In such situations, traders do not get access to the right options contracts, which affects both hedging and trading activities. To address this issue, SEBI is now preparing to introduce a dynamic and standardised strike price framework. Let’s understand what this means.
What’s Happening?
SEBI has proposed a new framework for managing strike prices of options contracts. The objective is to ensure that sufficient In-the-Money (ITM) and Out-of-the-Money (OTM) strike prices are always available in the market, especially during sudden sharp market movements.
A strike price is the fixed level at which an options contract can be exercised. Often, the market moves up or down rapidly, but the available strike prices do not get updated at the same pace. This creates a shortage of suitable contracts for traders.
SEBI’s proposal will allow exchanges to add new strikes during intraday trading sessions and remove less-used far strikes so that trading remains aligned with actual market conditions.
Main Features of the Proposed Framework
Under the new proposal, exchanges will have to conduct regular reviews of strike prices and add new strikes in real time whenever required. This will provide traders with continuous trading and better hedging opportunities, even during rapid market movements.
An important aspect of the proposal is that it will not require brokers or market participants to make major technical changes to their systems. This means there will likely be minimal disruption to live market operations.
SEBI has also given exchanges flexibility in determining strike intervals and the number of contracts so that the framework can be adjusted according to the liquidity and trading activity of different segments. This arrangement will apply across all three segments: equity, currency, and commodity derivatives.
Current Challenges and SEBI’s Solution
Currently, exchanges like NSE and BSE follow different rules for strike price management. This inconsistency often creates challenges for traders, especially on high-volatility days.
During sharp market movements, hedging can become expensive or ineffective due to limited strike price availability. Retail traders may also struggle to find appropriate contracts, which can affect their trading strategies.
SEBI’s standardised framework is an attempt to reduce these issues. With intraday additions and daily reviews, strike prices will remain closer to prevailing market levels, which could make trading activity smoother and more efficient.
What Does This Mean for Investors?
This proposal is important not only for large institutional investors but also for retail traders. Having the right strike prices available during sharp market fluctuations can help traders manage risk more effectively.
Better liquidity and reduced trading disruptions could make the options market more active and efficient. At the same time, transparent and uniform rules may help strengthen confidence in the market.
However, simply having more strike prices available does not guarantee success. Many retail traders participate in options trading without fully understanding the associated risks and continue to incur losses. Therefore, along with a better framework, stronger risk management and disciplined trading will remain essential.
What’s Next?
SEBI’s proposal is being viewed as an important step towards making the Indian derivatives market more modern, faster, and aligned with global standards. Measures such as real-time strike price additions could make trading smoother and more transparent, even during sudden large market movements. This has the potential to improve price discovery and enhance liquidity in the market.
The proposal will apply to equity, currency, and commodity derivatives segments, which could create a more uniform and flexible framework across the entire derivatives ecosystem. Especially during periods of high volatility, this system may help provide a more efficient trading experience for both investors and traders.
However, the proposal has not been implemented yet. SEBI has invited public suggestions on the proposal until 15 June, after which a final decision will be taken.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
