The Securities and Exchange Organization has allowed market making funds to issue various types of option contracts.
Issuing options contracts so far was within the purview of the Capital Market Development Fund (CMDF). The fund operates in tandem with the Capital Market Stabilization Fund, jointly responsible for supporting the bourse and help safeguard the interest of investors.
An options contract is an agreement between two parties to facilitate a potential transaction involving an asset at a preset price and date.
According to a press release of the Securities and Exchange News Agency, market makers can issue put options contract equivalent to 20% of the number of underlying assets.
A put option is a financial market derivative instrument that gives the holder the right to sell an asset at a specified price (the strike) by a specified date. Put options are most commonly used to protect against stock price decline below a specified price.
If the price of a stock declines below the strike price, the holder of the put has the right, but not the obligation, to sell the asset at the strike price, while the seller of the put has the obligation to purchase the asset at the strike price if the owner invokes the right to do so.
Issuing put options is primarily to reassure investors that their shares hold value and that they reconsider before selling. The move also is in line with government efforts to lift the share market that has taken a hit since the August of 2020.
As per the procedure, investors buy put option for stocks that they own. It is like buying insurance, or hedging against a possible decline, because the put option guarantees a set sell price on that stock.
Put options increase in value as the underlying asset falls in price, volatility of the underlying asset price increases and interest rates decline.
They lose value when the underlying asset’s price increases, volatility of the underlying asset price decreases, interest rates rise and expiration nears.
Through CMDF, the stock market regulator has issued put option contracts for stocks in majority of large cap companies to support shareholders and reassure them that such stocks are valuable.
Allowing market makers to issue options contracts comes at a time when, as many market observers opine, majority of shares are traded much below their real value due to pattern of decline in the troubled share market.
Market makers essentially act as wholesalers by buying and selling securities to balance the market. Their role has gained increased traction in recent months and after share prices fell to unprecedented lows.
