Sunday, August 28, 2011

Introduction of Futures and Options on Global Indices on NSE

As per SEBI guideline and permission, NSE is set to launch Futures and Options contracts on " S&P 500" and only futures contracts on "Dow Jones Industrial Average" (DJIA).

Now instead of Tracking these indices and taking queue over here, we might as well trade on such indices or hedge on such indices.

Before discussing the impact of such indices, let us understand its features.

S & P 500


How it will show on NSE F&O Screen

Lot Size



No of Contracts available


M1, M2, M3,Q2,Q3,Q4
M1, M2, M3, Q2,Q3,Q4


3rd Friday of Every Month
3rd Friday of Every Month

Last Trading Day

Same day as Expiration
Same day as Expiration


Cash Settlement
Cash Settlement

Underlying Currency

Indian Rupees

Indian Rupees

Types of Option


Not available


Span Margin

Span Margin

Settlement Price

Opening Price of S&P 500 on CME
Opening Price of DJIA on CME

There are several Advantages of trading in Global Indices in India They are mentioned as below

a) S&P 500 would be traded on stock Exchange outside USA for the first time. This would also enable many FII to take position in India but as of now only Resident Indians as per SEBI guidelines can trade.

b) This will enable investors to take positions or Hedge on International markets.

c) Simplicity : It is simple as we trade in nifty as the underlying is traded in Indian rupees. There is no currency exposure.

d) Easy Access : It will give easy access to all investors in every part of the country.

e) There is a facility to see live quotes of CME to take position.

f) There is trade and settlement guarantee fund of NSE, which will enable security of our settlement.

g) New strategies can be introduced in market based on Nifty, DJIA & S&P 500 and its movement and correlation

h) Updates on development in these index will help up see broad trends of industry globally.

i) There are benefits of cross-margin between  DJIA and S&P 500.

There are some thing to be understood before trading

a) You will have to pay taxes and STT as per Indian law only. It may lead to price distortion between prices in India and abroad.

b) The Settlement price of these contracts are computed based on opening price of all its stocks. That is termed as SOQ( Special Opening Quotations). Please understand that opening price of Index is not same as SOQ price. there is a slight difference.

     Normally when market opens we get quotes and opening prices at the open of trading but there would be some stocks which will trade after some time may be minutes or after an hour. In the meantime there may be many prices which would have been derived on DJIA and S&P 500. What SOQ does is, it considers opening prices of all its constituents, (though they may have been traded after some time) and derive a opening price such price is called as SOQ prices which would be the final settlement (we will discuss more on rationale of SOQ later).

    What it also means that if you have position at the close of settlement, you are not aware of the settlement price till the opening of American markets and then only you will know the settlement price which may be different from Dow futures or S&P futures which you may see our market times.

c) Initially there wont be participation of FII in these segment of market and as such there wont be a live trading on underlying which may result in illiquidity, higher bid-ask spread, outlier trades.

d) Trading in DJIA and S&P is almost 23 hours, because there are 2 types of trading on CME. a) Pit Trading and Globex (Electronic Trading. These electronic trading system is open for 23 hours.) but there will be problem of liquidity on these exchanges at odd hours (when there is night is USA and we Trade.)

To sum it up, it add one more tool for trading in our arsenal but we may play blind bets on overnight positions where there will be volatility in that market and the price will change over there and we will only be the price taker at the open of trade over here.

Some more FAQ, if you are not bored :

a) How do we trade : It is on individual preference, but as mentioned price discovery on underlying will take place only in American markets, when our markets will be closed. The initial strategy would be to trade by taking positional view on these index (may be for 3 - 4 days) or create a hedge for position in Indian assets.

b) Why is the final settlement at the opening price ? 
                                            There are market makers / Specialist in that markets appointed by the companies and Exchanges. These market makers / Specialist are obliged to give quotes during the day and absorb all demand and supply of individual stocks. So when the market opens these people absorb all demand and supply at the opening price with the obligation to make sure that there is lowest possible drift from previous closing price. Because of these, arbitrageurs in that market who have positions between underlying and Index buy / Sells at opening price to track SOQ prices. Opening price in such markets is a good indicator.(of overnight information change, overnight  liquidity needs and Noise (Fama))These prices are equilibrium price as it absorbs all demand and supply at the open.and If we compute the opening prices of all such underlying stock we get SOQ which is perceived to be a good and equilibrium opening price. Many other exchanges in America (like CBOE) use SOQ prices for settlement.

c) How about trading in Options : You can trade in options only on S&P500. The queue of Implied volatility will come from CME only and the would be little higher in India (because of Illiquid Indian markets for these products)  .
    In the Money calls will be cheaper (because of higher STT on Exercise). Also the cost of adjustment will be higher because of bid  ask -  spread.

I welcome your comment, suggestions and queries.


  1. i just want to know how global indices effect on indian stock market

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