Dumb circuit limits on gold options

[Mayank_Agrawal2]

I was checking options on 140000 goldm march expiry and the lower circut limit don’t make any sense. it’s too big that nobody wants to buy and hence there are zero trades and hence the price don’t reach lc anytime and hence the limit don’t get reduced. they should atleaset reduce limits based on pending orders as well rather then completely relying on ltp

[niftymonk]

@Mayank_Agrawal2

I was checking options on 140000 goldm march expiry and the lower circut limit don’t make any sense. it’s too big that nobody wants to buy and hence there are zero trades and hence the price don’t reach lc anytime and hence the limit don’t get reduced. they should atleaset reduce limits based on pending orders as well rather then completely relying on ltp

MCX option circuit limits are not based on demand, order book depth, or whether trades are happening. They are set using a theoretical pricing model where the exchange stress-tests the option under extreme underlying moves and volatility shocks. The lowest and highest theoretical values under those stress scenarios become the lower and upper circuits.

In the March 140000 PE case, because there is still time to expiry, the exchange assumes that under a sharp fall in gold or a volatility spike the option value can expand significantly. That’s why the range looks wide. If market participants believe fair value is below the lower band, they simply don’t place bids which is why the bid side appears empty. The exchange does not shrink circuits based on pending orders, as that would create manipulation and risk-management issues.

There was a similar discussion earlier on TradingQnA as well:

Bug in MCX circuit limit calculation?

We haven’t received a reply yet, but here’s the answer: The upper and lower price bands are determined using a statistical method based on the Black-76 option pricing model and are relaxed in accordance with movements in the underlying futures contract; it has nothing to do with the previous close. In the event of frozen price ranges even without a corresponding price relaxation in the underlying futures, the Exchange may relax the Daily Price Limit if deemed necessary, considering volatility a…

So this is not a bug. It’s how MCX’s model-based risk framework is designed.

[BB789]

Which is dumb indeed.

[niftymonk]

@BB789

Which is dumb indeed.

Agree. There should be no circuit limits at all.

[BB789]

Especially when the same asset is being traded in bigger markets without circuits.

[Mayank_Agrawal2]

The current framework increases manipulation instead of decreasing it. As no institutions will participate in mcx and will trade somewhere else, shrinking the volume and increased manipulation. Yesterday is best example, when silver was down by 5-6%, we expect put options to rise, but due to enforced circuit limits they were already trading higher, and hence in reality when silver was down, the put options were also down.

[Mayank_Agrawal2]

Really fed up with how mcx is adding lcs. No option pricing model will model 2L option lower than 1.9L or 1.8L, but MCX has put the LC of these options more than 2L. MCX is just lying about investor protection. At this point even I am not sure if MCX is operated by dumb people or corrupt ones.

[Mayank_Agrawal2]

@Arockiya_Raja @siva this needs to be raised with MCX, or with SEBI as they have now created utter bullshit system for lower circuits. If indeed they are using some model, make the model public, or show the proof of their authenticity.

[siva]

@Mayank_Agrawal2

this needs to be raised with MCX, or with SEBI as they have now created utter bullshit system for lower circuits. If indeed they are using some model, make the model public, or show the proof of their authenticity.

@Adarsh_Patil @Shiva_ms

[Risky_trades]

Seems they changed the circuit calculations