Option Contracts Gain Traction

EghtesadOnline: Option contracts have become more popular in Iran’s capital market as a means for insuring stocks against price volatilities.

News ID: ۷۸۷۵۷۶

08 January 2022

According to Meysam Moqadam, head of the Innovative Financial Instruments Taskforce at the Securities and Exchange Brokers Association, option contracts have rocketed by 14,000% in the past three years, Securities and Exchange News Agency reported.

Option instruments were initially introduced in 2025 but gained widespread recognition two years later.

“In fiscal 2018-19, there were 32,000 option contracts with 4-5 stocks as underlying assets. That number has now reached 4.5 million with underlying stocks at 33,” Moqadam was quoted as saying.

Put options are the most widely traded in the domestic stock market and the regulator encourages big companies and blue chips to employ these options due to their high market value and impact on the main index Tehran Stock Exchange, TEDPIX.

A put option is a contract giving the owner the right, but not obligation, to sell a specified amount of an underlying security at a pre-determined price within a specified time frame. Buying a put option when the buyer also owns the stock is like buying insurance, or hedging against a possible decline, because the put option guarantees the owner of a particular share a set sell price on that stock at a later date.

Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities and futures.

According to Moqadam, the TSE’s Capital Market Development Fund (CMDF) is in charge of issuing the contracts with the objective of “expanding the market and helping the liquidity of stocks”.

Operating in tandem with the Capital Market Stabilization Fund, the CMDF is a known mutual fund in terms of resources and has been assigned in the past with the task of supporting the bourse and help protect the interest of investors.

National Iranian Copper Industries Company, Mobarakeh Steel Company, Mobile Telecommunication Company of Iran, Bank Saderat Iran, Tejarat Bank, Isfahan Oil Refining Company, Tehran Oil Refining Company, Telecommunication Company of Iran, Bandar Abbas Oil Refining Company, the two main carmakers Iran Khodro (IKCO) and SAIPA, Bank Mellat, the Persian Gulf Petrochemical Industries Company and Social Security Investment Company are among the TSE-listed companies whose shares are traded on option contracts.

Issuing put options is primarily to reassure investors that their shares hold value and they are better reconsider before selling. The move also is in line with government efforts to revive the struggling share market that has incurred huge losses since the summer 2020.

Put options increase in value when the price of the underlying asset falls, volatility of the asset price increases and interest rates decline.

They lose value when the underlying asset’s price rises, volatility of the underlying asset price decreases, interest rates rise and expiry nears.