The growth of options since its introduction in June 2001 has been phenomenal. The Indian markets have now discovered the practicality of hedging it in stock market exposures. But curcumstantial evidences show that money laundering is being done making use of thinly traded options. Will the regulators take a look at this?

The history of derivative trading in the Indian stock market is not very old. Derivatives trading first started in index futures in June 2000. After one-year trading in index options started trading in stock options and stock futures started in July 2001 and November 2001 respectively. In the beginning, there were 31 stocks in which options trading were permitted on NSE, and at present there are 41 stocks in which option trading is allowed. The volume in the stock options has shown a continuous uptrend.

The basic purposes for which stock options were introduced were in India to provide a hedging tool and make the markets more efficient. Stock options are also used by speculators to make gain by making a prediction about the future price of stocks and also by arbitrageurs to make riskless profits. But by observing prices of some of the stock options being traded on NSE, it cannot be said with certainty whether they are being used for these purposes or for some other purposes. The stock options generally derive their value from prices of underlying stock but there are other factors like volatility, risk-free rate, dividend announcement etc., that can affect the option prices. The fluctuation in a single day in some of stock options being traded on NSE is quite high as compared to the price of underlying stocks in cash market. This seems quite unreasonable as some other factors like volatility, risk-free rate, dividend yield will not fluctuate much in a day and it will be only the spot price that will affect the option prices. The number of such transactions was very high at the end of the financial year and such transactions are being regularly executed

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