Lack of ETF Options in India

by Manshu on May 22, 2011

in ETF

This is another post from the Suggest a Topic page, and it’s about Options trading on ETFs, or rather the lack of ETF Options in India.

Here is Amruta’s comment.

ETF Options are widely traded in US markets. Would like to know ur take on their introduction in Indian markets? which etfs should they b introduced on?? Thanx..

I feel that it’s only a matter of time when Options are introduced on ETFs in India. In fact a few months ago there were plans to create Options on the popular Benchmark Gold BeeS ETF on NSE, but then the FMC (Forward Markets Commission) wrote to the NSE (National Stock Exchange) saying that they should have jurisdiction over Options trading on the commodity based ETF since they already regulate commodities future, and this is quite similar to that product.The launch was then stopped, and since then I haven’t read anything on the matter, but I think this will happen in due course, and after that Options on other ETFs will be launched as well.

I think that it’s good to have Options on these ETFs, as it allows people who are so inclined to take positions and test out their theory.

I have no doubt that a lot of people will lose money in trading Options, but that is no different than trading in stocks, and I’m sure there will be people who make money on them as well.

It also allows you to take short positions which you can’t do without Options. For example, currently, there are no easy ways for small investors in India to take a short position in gold if they’re so inclined but if there were Futures and Options on Gold BeeS they could have sold a Future or bought Puts.

Compare this with the US where a small investor can easily buy long dated Puts on either the popular gold ETF GLD, or even gold mining companies like ABX, and I feel that the Indian investor is at a disadvantage.

Options are not for everyone, but there is a segment of investors who understand these products, can use them, and even eagerly awaiting them, and I feel that it’s only a matter of time before which their wish is granted.

{ 8 comments… read them below or add one }

arif May 22, 2011 at 8:30 pm

Hi, i think the question has been misinterpreted.

It doesnt seem to me that thw question is about ‘Options on ETFs’

it is a question of the variety of ETF’s available in the market place.

We have a long way to go when it comes to Futures & options on ETF’s, as the current ETF’s are mostly illiquid with only 2 Motilal ETF’s trading an average volume of over 1lakh shares a day.

Reply

Manshu May 23, 2011 at 5:59 am

Hi Arif,

I may be wrong but the question states “ETF Options are widely traded in US markets. ” and then goes to state that “which etfs should they b introduced on??”

Reading that I feel that the question is “which ETFs should options be introduced on?”

Gold BeeS has great volumes, and I think that’s one where they can can easily introduce Options on – the turnover for today shows to be Rs. 991 lacs, which is more than some stocks that do have Options on them.

Reply

George May 23, 2011 at 5:14 am

May be a off-topic, but how do you get the “Sign up for Email Subscription” option, is it a plugin? Wordpress is a new stuff for me. Please point me to right direction or write an article to help us as it’s your personal blog and not limited finance.

Thanks

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Manshu May 23, 2011 at 5:59 am

That’s simply Feedburner Email Subscription. Google that up, and you will find a lot of info on how to implement that – it’s very easy to do.

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George May 23, 2011 at 6:13 am

Thanks Manshu, you made my day. πŸ™‚ I wasn’t aware what it is being called. I do see a lot of resource available online. Thanks again for pointing me to right direction.

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Manshu May 23, 2011 at 6:19 am

Awesome! and you can always use the forum to ask any questions you have. The link is on the side rail.

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Amruta May 23, 2011 at 9:27 pm

Hey manshu, you have got the question right…. the post was good… i was also looking more for factors have made them such a hit there… infact their vols are more than index options in recent times.. some factors i got to know were small contract size hence affordable to small traders for executing strategies & liquid hence low impact cost….. pls let know if there are any other factors that u r aware of….thanx….

Reply

Manshu May 24, 2011 at 8:49 am

While they are popular, in general the Options of ETFs that are quite liquid are liquid themselves, and that’s how you’d expect it to be. While you can buy a lot of Call and Put Options for $100 or so, the brokerage charges make it expensive. For example Sharebuilder charges $10 per transaction, so that’s very high if you had to buy a small contract.

The large volumes in ETFs are usually attributed to institutional investors and automated trading systems, and I think the same will be true for ETF Options also. Instead of lots of small guys, there will be a few big players who make up most of the volume.

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