What is Optionable Stock?
Equity investing is a great way to generate returns. However, there can be other rationales for investing in securities like leveraging a position or hedging risk. Such rationales may be realised by trading derivatives.
Derivatives trading is a boon to advanced investors. It does not only has the potential to generate higher returns but also to hedge risk or speculate on price movements. Derivatives trading can be of four broad types - Forwards, Futures, Options, and Swaps. Forwards and Swaps trade Over-the-counter (OTC) whereas Futures and Options are majorly exchange-traded. Not all trading stocks have the facility to trade in futures and options. This article details what Optionable Stock is.
Options trading allows the investors to obtain the right to transact a particular stock on a specific date at a pre-determined price. The buyer of the options contract holds the right to buy or sell the security. The options contract that gives the right to buy a security is called the Call Option; the contract that gives the right to sell refers to the put option. Options trading is risky and requires stocks to follow specific criteria like minimum share price, the total number of shares outstanding, and liquidity, among other factors.
A stock qualifying for options trading is known as optionable stock. Optionable stocks provide an advantage to investors by allowing them to hedge their positions in that stock and mitigate the involved risks. Not only stocks but a few exchange-traded funds (ETF) also trade under options.
An optionable stock allows investors to purchase options on the underlying stock, providing them with the right to buy or sell shares of that stock at an agreed-upon price, called the strike price. If a security is not optionable, an investor can purchase an OTC option contract to gain the same benefits as if they owned the optionable stock itself. However, the OTC options contract poses additional counterparty or default risk that is not the case in an exchange-traded optionable stock.
Various combinations of buying and selling call and put options can be applied to gain the maximum benefit of an options contract. These are known as the options strategies. These strategies are derived by the experts keeping speculation or risk mitigation in mind. The underlying asset of an options contract can be stocks, bonds, commodities, or currencies. Optionable Stocks may be of interest to individual traders speculating the price movement, while the corporates use optionable bonds/commodities/currencies to hedge interest rate risk, price risk, etc.
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) provide the complete list of optionable stocks in India. Options trade on these two major platforms, regulated by the Securities and Exchange Board of India (SEBI).
Requirements of Stock to be Optionable
Not all publically-traded companies are available for options trading. A stock must qualify specific criteria to list itself as an optionable stock. According to the Securities and Exchange Board of India (SEBI), the capital markets regulator of India following are the criteria for the securities to be optionable:
- The security must rank in the top 500, with the highest average daily market capitalization and traded value in the last six months on a rolling basis.
- Median-quarter sigma order size of the stock should be a minimum of INR 1 Lakh in the previous six months.
- The minimum market-wide position limit in the stock should be INR 50 Crores.,/li>
- The company must not have received any winding up petition by a National Company Law Tribunal or NCLT.
- A stock becomes optionable immediately after qualifying all the requirements. It is excluded from the category if it fails to fulfil the eligibility criteria for three consecutive months after receiving the optionable stock status.
Frequently Asked Questions Expand All
Ans: Stocks that are eligible to trade in the derivatives market as options contracts are called optionable stocks.
Ans: No, not all publically-traded stocks qualify as optionable stocks. For a security to be optionable, it needs to fulfil pre-determined criteria.
Ans: Market capitalization, the daily volume traded, order size, and position limit are a few factors that determine if the stock is optionable.
Ans: Yes, in India an optionable stock is removed from the category if it doesn’t fulfil the criteria in three consecutive months.
Ans: An optionable stock is removed from the category if it doesn’t fulfil the criteria in three consecutive months.
Ans: No, along with stocks, ETFs, commodities, currencies, and bonds can be optionable too.