Option Sellers may consider themselves as Masters of the Universe but Institutions look upon them as sellers of cheap insurance to hedge their Portfolios, which is Part of the Cost of doing Business, and are happy paying for it. Well the cost of this Insurance just got higher
I think the new ASM measures will increase the cost of Options particularly in closer to the Money Options. Notice the 50% concession given to Options at least 5% OTM? That's precisely where Institutions hedge their Portfolios.
This is a stupid move and will suck liquidity out of what is already a fairly illiquid Market. It will also severely impact the Business of all kinds of Financial Intermediaries and I am surprised that they have let this happen without raising a peep
I can understand the concern with unbridled speculation but the way to treat that without hurting liquidity would have been to introduce the US T-Reg Margining where the Total amount at Risk is taken as Margin. This would have forced Traders to take covered Positions
And it would have increased liquidity dramatically as the lower Margins on Spreads would have encouraged higher Volumes. The Bnf now is practically dead with a Margin of about 1lac/lot. For the moment the Expiry Trade remains alive-but for how long?
