Isn’t it time to report options turnover based on the premium and not on the notional contract?

Futures and Options (F&O) segment in the stock exchange attracts huge volume of transactions. The turnover reported by the National Stock Exchange (NSE) on a daily basis is so high that it sounds too good to be true on any given day. Did you know that NSE reported a turnover of more than 2 lakh crore in its F&O segment on 20 June 2013? While it was one of the highest in recent times because of upheaval in the market yesterday, the fact is that the turnover did not happen for this amount in NSE in the F&O segment. Most of this turnover volume reported is notional. Let us look at the data to understand this.
 

As per NSE website, on 20 June 2013, the F&O segment of NSE reported following turnover:
 

The trade statistics clearly reflects that majority of the turnover was Index Option segment. In fact more than 80% of the transactions happened in the options segment including index and stock options. But this number has been reported as notional by the NSE. Now the question is—why is the word notional here? This needs to be understood as follows. Suppose you buy a single lot of call option on the Nifty with a strike price of 6,000 and pay a premium of Rs6 per lot size, the amount paid by you will be Rs300 only as the lot size of the NIFTY is 50, so the amount works out to be (Rs6 x lot size—fifty). So for a trader the amount is equal to premium* lot size*number of lots.
 

But the exchange will treat this transaction differently and report differently as far as turnover reporting is concerned. The turnover in this case will be treated as (Strike price plus premium) * lot size. This means that in the previous case the transaction value will be 6,006*50 i.e. Rs3,00,300. So for a Rs300 position that was taken by a trader, the turnover reported was more than 1,000 times. While it may not be thousand times always, it is indeed substantially higher than the position taken by trader in options transactions.
 

This method of recording turnover can be related to the Rs200 crore reported in case of Wing Commander CR Mohan Raj, who is fighting his case against Motilal Oswal Securities Ltd . The high turnover reported shows that that the investor needs to be filthy rich to transact for this kind of volume while the case is different practically. This is based on my assumption that Mr Raj took position in options transaction.
 

While it is true that the payoff position of an investor in the options contract depends on the difference in the spot and strike price and strike and spot price in respective cases of call option and put option at the time of expiry, it does not make sense to report this turnover.  This can make sense to the exchange only if it levies charges from brokers based on the turnover. Inflated turnover means more revenue which is not the case now as NSE and SEBI (Securities and Exchange Board of India) both charge turnover fee based on the premium in options. Isn’t it time to report option’s turnover based on the premium and not on the notional contract?
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)