Strike price interval

An exchange cannot list a strike price for every conceivable price level — it has to pick a fixed spacing and list strikes at that spacing, so that traders across the market are all trading the same defined set of contracts.

For Exchange Traded Interest Rate Options, the workbook's contract specification table sets that spacing directly: "Strike Price Interval: Rs 0.25 (For e.g. strike will be available at Rs 99.50, 99.75, 100.00, 100.25, 100.50, etc.)."

The strike price interval is one row of the workbook's full contract specification table for Exchange Traded Interest Rate Options, and it works together with a second rule about how many strikes must be listed:

• Strike price interval: Rs 0.25. Every listed strike is a multiple of 25 paise away from its neighbours — 99.50, 99.75, 100.00, 100.25, 100.50, and so on.
• Number of strikes: a minimum of eight in-the-money, eight out-of-the-money, and one near-the-money strike must be provided for all available contracts. That works out to a minimum of 17 strikes available at any time (8 + 8 + 1) around the current price of the underlying bond.

Together these two rules mean the range of strikes on offer moves automatically with the underlying bond's price: as the bond's price rises or falls, the exchange keeps at least eight strikes below and eight above the current price, always spaced Rs 0.25 apart, so there is always a near-the-money strike close to wherever the market currently sits.

This sits alongside the other numeric parameters in the same contract specification table: trading hours 9:00 a.m. to 5:00 p.m., Monday to Friday; a trading cycle of three serial monthly contracts followed by three quarter-end contracts (Mar/Jun/Sep/Dec); expiry on the last Thursday of the month; cash settlement; and a T+1 final settlement cycle.

A 10-year Government of India bond underlying an Exchange Traded Interest Rate Option is currently trading around Rs 100.10.

Because strikes are spaced at Rs 0.25 intervals, the near-the-money strike is Rs 100.00 (or Rs 100.25, whichever the exchange treats as closest). To meet the minimum eight-and-eight rule, the exchange must list at least:

That is a minimum of 17 strikes available for trading at this bond price. If the underlying bond's price rises to Rs 101.50 over the following weeks, the exchange must extend the ladder of strikes upward to keep at least eight out-of-the-money strikes available above the new price — the Rs 0.25 spacing stays fixed, but the range of strikes on offer shifts with the market.

A trader wanting a strike of, say, Rs 100.10 simply cannot get one — only strikes that are exact multiples of the Rs 0.25 interval (99.75, 100.00, 100.25, and so on) are ever listed.

Chapter 4 (Exchange Traded Interest Rate Options), section 4.9 (Contract Specification of Exchange Traded Interest Rate Options), fixes the strike price interval at Rs 0.25 in the same table row sequence as the number-of-strikes rule, the trading cycle and the expiry day. Expect a direct recall question on the Rs 0.25 figure and the worked example strikes (99.50, 99.75, 100.00...), plus a question on the minimum eight ITM / eight OTM / one near-the-money strikes rule that sits immediately below it in the same table.

• Rs 0.25 is the interval between strikes, not a premium, margin or price band figure — it is purely about how far apart consecutive strike prices are set.
• The strike interval and the minimum-number-of-strikes rule are two different rows of the same table — a question may ask for either the Rs 0.25 spacing or the "8 ITM, 8 OTM, 1 near-the-money" minimum, and conflating the two loses marks.
• The available strikes move with the underlying bond's price — the exchange keeps extending the ladder to maintain the minimum ITM/OTM/near-the-money coverage as the market moves, rather than fixing a static list of strikes for the life of the contract.
• This is specific to Exchange Traded Interest Rate Options' own contract specification — other exchange-traded derivatives (equity options, currency options) have their own strike interval rules, which this workbook does not state and which should not be assumed to be the same Rs 0.25 figure.