The Capital Market Development Fund (CMDF) will start offering put options for retail investors at Tehran Stock Exchange and Iran Fara Bourse on Saturday in line with government's supportive measures to lift the struggling capital market.
According to the SENA news agency, the contracts can be purchased by investors with portfolios less than 1 billion rials, accounting for nearly 96% of the investors. The contracts have a maturity of one year and guarantee 20% profit.
A put option is a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame. Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities and futures.
The Securities and Exchange Organization (SEO) board approved the measure earlier this week putting the CMDF in charge of issuing the contracts.
Operating in tandem with the Capital Market Stabilization Fund, the CMDF is a mutual fund tasked with supporting the bourse.
As per the measure, about 10 million contracts are to be offered for one week.
Issuing put options is primarily to reassure investors that their shares hold value and should rethink before selling. The move also is in line with government's comprehensive package designed to support the stuttering bourse.
As per procedures, investors buy put option for stocks they own. It is like buying insurance, or hedging against a possible decline, because the put option guarantees a set sell price on that stock.
Put options increase in value if the underlying asset falls in price, volatility of the underlying asset increases and interest rates decline.
However, they lose value when the underlying asset increases in price, volatility of the underlying asset decreases, interest rates rise and expiration nears.
Share market officials earlier announced plans to offer put options for stocks of 15 large cap companies to support shareholders and reassure them that the stocks are safe.
Some market observers have expressed cautious optimism about the effect of put options on reviving the capital market, including Hamed Satak, the CEO of Aria Novin Brokerage, who recently said that put options could prevent hasty decisions by nervous investors.
"The plan is expected to help the market. Insuring profit on investments can underpin investor resilience even if the market is swinging," he said.
Satak called on policymakers to expand the scope of the coverage so that investors with larger portfolios could purchase put options. "This could gradually help restore public trust in the capital market.”
As per the plan, new resources will be made available from state funds for share purchase and increase gradually. Also, money allocated to the capital market in the 2022-23 budget to the tune of 50 trillion rials ($151 million) will be deposited with the Capital Market Stabilization Fund (CMSF).
Legal persons, including semi-public companies and financial institutions, retirement funds, military organizations are responsible, according to the new support package, to regularly monitor share prices under their administration and avoid selling until market conditions are stable. They have been recommended to take supportive measures such as purchasing shares and publishing put options.
