You would have had an experience of being blocked from buying or selling few options and be wondering why. Here is the answer. Illiquid Options are blocked as per Tradeplus’s internal Risk management policy in order to protect traders from been stuck with a position in the absence of counter parties to cover the same. For example if we allow to buy an illiquid contract, a client would be able to create a position in it by buying or selling the contract. A risk arises when the client is unable to square off the position due to non availability of counter party which is highly common in illiquid contracts. As a result of this, the client would necessarily be required to bring in additional margins failure of which would attract penalties These penalties will be on the broker for not taking due diligence to prevent trading in illiquid contracts. To avoid these we block illiquid contracts.
Basis of ascertaining illiquid contracts
Index – Let us take an example of Nifty. We take the highest traded (in terms of volume) strike price as a benchmark. We compare the volumes of all Nifty strike prices against this benchmark and block those strikes which had registered less than 1% of volume traded as against the benchmark. Such contracts will not be available for trading the next day.
Let us assume that current month Nifty 15000CE had registered a volume of 1 lakh contracts and that this is the highest for the day in terms of volume. Now all Nifty Options which had registered a volume of less than 1000 contracts will be blocked for next day’s trade.
Stocks –The same logic is applied for stock options but the % of minimum volume traded should be at least 3% or more to be open for trade. Any contract that records less than 3% of volume as against the benchmark will be blocked for trading.
Let us assume that current month Infy 1380CE had registered a volume of 5000 contracts and that this is the highest for the day in terms of volume. Now all Infy contracts which had registered a volume of less than 150 contracts will be blocked for trade on the next day.
These measures are solely done to protect traders from getting trapped in sparsely traded contracts. Kindly take note of these while trading.
Here is the list of contracts blocked for the day