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How Execution Range Effects your Option Trading?

  • Friday, 07 July 2017
How Execution Range Effects your Option Trading?

Today we will discuss Execution Range and its effect on your option trading. Currently, option trading has been contributing up to 80% of total exchange volume in NSE. But the liquidity is limited to present month contracts. With low trading activity in most contracts, there is a higher probability of higher impact cost.

Impact cost is the difference between ordered price and executed price.

To save traders from higher impact cost, the exchange has prescribed execution range for option contracts. Now let us see how it protects the interest of traders.

But first the definition,Execution range is the price range on both sides of the current price of a contract.

It refers to a range in which you can place orders for the various option contracts. Order placed beyond this range will be rejected.

Price for each contract shall be calculated as follows,

  1. At market open  Option price derived from the underlying price.
  2. During market hours  1 minute simple average of trade prices.

According to NSE the execution range on both sides of price would be:

Now let’s explain it with a simple example

Consider the price of a deep ITM (in the money) Nifty option is 100. Now check the below Order Window.

  • We know from the previous table, execution range for this option would be from 80 to 120. (20% of both sides)
  • Anything beyond this range will not be accepted by the exchange.
  • Now if we put a buy market order of 20 lots @ 100, then only 12 lots will get executed at 105 and 112 respectively.
  • But without this prescribed range, our remaining 8 lots would have executed at 125, thus higher impact cost for traders.
  • This implies that orders and trades which are not close to the market price or strike price will get automatically rejected.

Points to note:

Execution range is available only for Futures and Options trading in NSE. It is applicable for near month and far month contracts. All orders above or below this range will be cancelled, so always check your market orders in illiquid contracts.

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