Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Teji-Mandi goes to Chicago

Options with one-day maturity (known as Teji and Mandi for call and put options) were popular in Indian equity markets during the 1970s and 1980s though they were prohibited under the Securities Contracts (Regulations) Act, 1956. With the equity market reforms of the 1990s, these contracts disappeared completely.

One-day options are now being proposed by the Chicago Board Options Exchange (hat tip FT Alphaville). In its regulatory filing, the CBOE says:

The Exchange believes that Daily Option Series will provide investors with a flexible and valuable tool to manage risk exposure, minimize capital outlays, and be more responsive to the timing of events affecting the securities that underlie option contracts. In particular, the Exchange seeks to introduce Daily Option Series to provide market participants with a tool to hedge overnight and weekend risk, as well as the risk of special events such as earnings announcements and economic reports, and pay a fraction of the premium of a standard or weekly option (due to the very small time value priced into the option premium). The Exchange believes that daily expirations would allow market participants to purchase an option based on a precise timeframe thereby allowing them to tailor their investment or hedging needs more effectively.

Regulatory fashions come and go – often, a financial innovation is only the reintroduction of something that existed decades or centuries ago. Much of what happens in modern equity markets (good or bad) can be traced back to early 17th Century Amsterdam. (See for example, Geoffrey Poitras, From Antwerp to Chicago: The History of Exchange Traded Derivative Security Contracts and Jose Luis Cardoso, “Confusion de confusiones: ethics and options on seventeenth-century stock exchange markets”, Financial History Review (2002), 9:109-123).

I have long believed that what was really wrong with things like Teji, Mandi or Badla in pre-reform Indian equity markets were not the instruments themselves but the absence of robust risk management and the lack of safeguards against market manipulation. There is nothing wrong with daily options – many high frequency trading strategies might effectively be replicating short maturity options. I would in fact wonder whether there is merit in options with even shorter maturity – hourly, if not even shorter.

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