NCFM Derivatives Market (Dealers) Module: Chapter 7 Short Notes (Part 2 of 3)
Chapter 7: Trading of Derivatives Contracts — Contract Specifications & Market Instruments
7.3 Futures and Options Market Instruments Overview
The Futures & Options (F&O) segment of the National Stock Exchange of India (NSE) provides standardized, exchange-traded facilities for four core derivative instruments:
- Index-Based Futures
- Index-Based Options
- Individual Stock Futures
- Individual Stock Options
All contracts traded on the F&O segment are standardized in terms of contract size, expiry dates, price steps, and settlement mechanisms to ensure market liquidity and eliminate counterparty credit risk through clearing house novation.
7.3.1 Contract Specifications for Index Futures
Index futures allow investors and institutional portfolio managers to trade or hedge against entire market movements efficiently.
| Category | Specification | Details |
|---|---|---|
| Instrument Descriptor | FUTIDX | Used for Index Futures (e.g., NIFTY) |
| Instrument Descriptor | Minimum Lot Value | Rs. 2 lakh |
| Trading Cycle | Contract Months | 3 Serial Months |
| Trading Cycle | Contract Structure | Near, Middle, Far |
| Expiry & Settlement | Expiry | Last Thursday of the Month |
| Expiry & Settlement | Settlement | Cash Settled (T+1) |
Key Operational Characteristics
- Underlying Indices: Traded on major equity indices including S&P CNX Nifty, CNX IT, BANK Nifty, and Mini Nifty.
- Trading Cycle: Contracts operate on a maximum three-month trading cycle:
- Near Month: Current calendar month expiry.
- Next (Middle) Month: Subsequent calendar month expiry.
- Far Month: Third calendar month expiry.
- Cycle Roll: Upon the expiry of the near-month contract on the last Thursday, a new three-month far contract is introduced on the following Friday.
- Expiration Day: The last Thursday of the expiry month (or the immediately preceding trading day if Thursday is a trading holiday).
- Order Book Priority: Each contract maturity maintains its own independent limit order book where passive orders are stacked according to price-time priority.
- Tick Size & Valuation Mechanics:
- Minimum price step (tick size) = Re. 0.05.
- Lot size for S&P CNX Nifty = 50 units (ensuring contract value is not less than Rs. 2 lakh).
- Gain or Loss per Tick Move = 0.05 * 50 units = Rs. 2.50 per tick.
Summary Contract Specification Table: Index Futures
| Parameter | Specification Details |
|---|---|
| Underlying Index | S&P CNX Nifty (and other approved indices) |
| Security Descriptor | FUTIDX |
| Permitted Lot Size | 50 units (minimum contract value of Rs. 2 lakh) |
| Price Step (Tick Size) | Re. 0.05 |
| Price Bands | Operating range of 10% of the base price |
| Trading Cycle | Maximum 3 months (Near, Next, Far month) |
| Expiry Day | Last Thursday of the expiry month |
| Settlement Basis | Daily Mark-to-Market (MTM) and final settlement in cash on T+1 basis |
| Daily Settlement Price | Closing price of the futures contract (weighted average price of last 30 minutes) |
| Final Settlement Price | Closing value of the underlying index on the last trading day |
7.3.2 Contract Specifications for Index Options & Strike Generation Policy
Index options provide non-linear payoff profiles, allowing market participants to implement hedging, income-generation, and directional strategies.
| Component | Example | Meaning |
|---|---|---|
| Expiry Date | 26NOV2009 | Date on which the option expires |
| Strike Price | 5000 | Predetermined price at which the option can be exercised |
| Option Type | CE | CE = Call Option; PE = Put Option |
| Exercise Style | European | Option can be exercised only on the expiry date |
Key Technical Rules
- Security Descriptor: OPTIDX.
- Style of Option: European Style (exercisable strictly on the expiration date itself).
- Standard Expiry: One-month, two-month, and three-month serial expiry cycles expiring on the last Thursday of the month.
- Settlement Basis: Cash-settled on a T+1 basis.
- Pricing Bands: Contract-specific price ranges calculated and updated daily based on option Delta values.
Standard Option Nomenclature Format
Contract descriptors follow a rigid syntax:
- Format: DATE - EXPIRYMONTH - YEAR - STRIKE - OPTION TYPE
- Example: 26NOV2009 5000 CE represents a European Call Option on the Nifty index with a strike price of 5000 expiring on November 26, 2009.
- Example: 30JUN2008 3040 CA represents an American Call Option descriptor (where CA/PA denotes American style).
Exchange Policy for Generation of Strike Prices
To maintain orderly market liquidity across In-The-Money (ITM), At-The-Money (ATM), and Out-Of-The-Money (OTM) options, the exchange prescribes specific strike price intervals and strike schemes:
Index Options Strike Generation Table
| Index Level Range | Strike Price Interval | Scheme of Strikes (ITM - ATM - OTM) | Total Minimum Strikes Introduced |
|---|---|---|---|
| Up to 2000 | 50 points | 4 - 1 - 4 | 9 contracts (4 Call/Put ITM, 1 ATM, 4 Call/Put OTM) |
| 2001 to 4000 | 100 points | 6 - 1 - 6 | 13 contracts (6 Call/Put ITM, 1 ATM, 6 Call/Put OTM) |
| 4001 to 6000 | 100 points | 6 - 1 - 6 | 13 contracts (6 Call/Put ITM, 1 ATM, 6 Call/Put OTM) |
| Above 6000 | 100 points | 7 - 1 - 7 | 15 contracts (7 Call/Put ITM, 1 ATM, 7 Call/Put OTM) |
Practical Strike Introduction Example:
- If the Nifty level trades between 4001 and 6000, the exchange maintains a 6-1-6 strike scheme with a 100-point interval.
- If current active strikes range from 4400 to 5600 and the index closes at 5051, an additional higher strike at 5700 is introduced to preserve the 6-1-6 balance.
- If the index drops and closes at 4949, a lower strike at 4300 is introduced.
- Formula for total tradable contracts across 3 expiry months under a 6-1-6 scheme: 3 months * 13 strikes * 2 option types (Call & Put) = 78 options contracts minimum.
7.3.3 Contract Specifications for Stock Futures
Single stock futures give market participants leveraged exposure to individual underlying equities without requiring full upfront cash payment.
| Parameter | Exchange Rule |
|---|---|
| Security Descriptor | FUTSTK |
| Minimum Contract Value | Rs. 2 lakh |
| Operating Price Band | 20% of Base Price |
| Settlement Style | MTM & Final Settlement in Cash (T+1) |
Summary Contract Specification Table: Stock Futures
| Parameter | Specification Details |
|---|---|
| Underlying Security | Approved individual equity shares listed in the cash market |
| Security Descriptor | FUTSTK |
| Contract Size (Lot Size) | Specified by exchange such that value is not less than Rs. 2 lakh |
| Price Step (Tick Size) | Re. 0.05 |
| Price Bands | Operating price band of 20% of base price |
| Trading Cycle | 3-month trading cycle (Near, Next, Far month) |
| Expiry Day | Last Thursday of the expiry month |
| Settlement Basis | Daily MTM and final cash settlement on T+1 basis |
| Final Settlement Price | Closing price of the underlying security in the cash market on expiry day |
7.3.4 Contract Specifications for Stock Options
Stock options allow targeted risk management and speculation on individual equity scrips.
Summary Contract Specification Table: Stock Options
| Parameter | Specification Details |
|---|---|
| Underlying Security | Individual equity securities eligible for derivatives trading |
| Security Descriptor | OPTSTK |
| Style of Option | European Style |
| Contract Size | Specified by exchange (minimum contract value of Rs. 2 lakh) |
| Price Step (Tick Size) | Re. 0.05 |
| Price Bands | Not Applicable |
| Minimum Strikes Offered | Minimum 11 strike prices per series (5 ITM, 1 ATM, 5 OTM) |
| Trading Cycle | 3-month serial month trading cycle |
| Expiry Day | Last Thursday of the expiry month |
| Settlement Basis | Cash-settled daily premium and final exercise settlement on T+1 basis |
| Final Settlement Price | Closing price of underlying security on exercise/expiry day |
Stock Options Strike Price Generation Table
The exchange determines strike price intervals based on the spot price range of the underlying stock:
| Underlying Stock Price Level | Strike Price Interval | Scheme of Strikes (ITM - ATM - OTM) | Minimum Strikes Introduced |
|---|---|---|---|
| Less than or equal to Rs. 50 | Rs. 2.50 | 5 - 1 - 5 | 11 strikes |
| Above Rs. 50 up to Rs. 100 | Rs. 5.00 | 5 - 1 - 5 | 11 strikes |
| Above Rs. 100 up to Rs. 250 | Rs. 10.00 | 5 - 1 - 5 | 11 strikes |
| Above Rs. 250 up to Rs. 500 | Rs. 20.00 | 5 - 1 - 5 | 11 strikes |
| Above Rs. 500 up to Rs. 1000 | Rs. 20.00 | 10 - 1 - 10 | 21 strikes |
| Above Rs. 1000 | Rs. 50.00 | 10 - 1 - 10 | 21 strikes |
7.3.5 Other Innovative Products in the F&O Segment
To meet diverse investor needs, NSE expanded its derivative product suite:
- Mini Nifty Derivative Contracts (Futures & Options):
- Launch Date: Introduced on January 1, 2008.
- Purpose: Features a significantly smaller lot size compared to standard Nifty contracts, extending affordability to retail investors and enabling hedging of smaller portfolio values.
- Long-Term Options Contracts on S&P CNX Nifty:
- Launch Date: Introduced on March 3, 2008 following SEBI committee recommendations.
- Contract Maturity Structure: Offers tenure extending up to 5 years (incorporating 3 quarterly expiries in March, June, September, December, followed by 5 semi-annual expiries in June/December).
- Strategic Benefit: Allows long-term institutional investors to take structural market positions without incurring rollover costs across short-term monthly contracts.
Key Terms & Important Concepts
- FUTIDX / OPTIDX: Security descriptors for Index Futures and Index Options respectively.
- FUTSTK / OPTSTK: Security descriptors for Stock Futures and Stock Options respectively.
- Operating Price Band: Daily price limits enforced by the exchange (10% for Index Futures, 20% for Stock Futures).
- Tick Size: The minimum allowable price movement in a contract, fixed at Re. 0.05 across all F&O instruments.
- European Option: Option contract exercisable only on the expiration date.
- Mini Nifty: Derivative contracts with smaller contract values introduced in 2008 for retail hedging.
- Long-Term Options: Nifty options with maturities up to 5 years designed for structural portfolio hedging.
Chapter 7 (Part 2) Summary Takeaways
- Four Core Derivatives: NSE trades Index Futures (FUTIDX), Index Options (OPTIDX), Stock Futures (FUTSTK), and Stock Options (OPTSTK).
- Standardized Expiration: All monthly contracts expire on the last Thursday of the expiry month and settle in cash on a T+1 basis.
- Contract Value Floor: SEBI guidelines mandate a minimum contract lot size value of Rs. 2 lakh at the time of introduction.
- Option Mechanics: Both Index and Stock Options on the NSE are European style.
- Systematic Strike Schemes: Strike intervals are dynamically governed by stock/index price ranges (e.g., 6-1-6 for Nifty between 2001–6000; 5-1-5 or 10-1-10 for stocks).
- Product Spectrum: Mini Nifty contracts cater to small retail portfolios, while Long-Term Nifty Options support institutional hedging up to 5 years.