- Court cases take upto 2-5yrs(at the minimum even at the apex level) and therefore LEAPs would be a great way for investors with legal acumen to take a considered bet on the outcome. For example, Bajaj Auto's right to purchase 24% of Maharashtra Scooters at a bargain basement price from the Maharashtra state government, is under dispute at the Supreme Court. An adverse outcome for Bajaj Auto could send the Maharashtra Scooters price skyrocketing as investors finally see value unlocking. Another example is the RIL-RNRL dispute over pricing of natural gas, on which LEAPs on RIL could have been profitable.
- To attract activist investors like hedge funds to improve corporate governance and encourage long term value creation, LEAPs are needed to encourage those investors to improve the company instead of voting with their feet and exiting.
- While companies DO issue warrants, that is usually done as a preferential allotment to investors, restricted to 18months and need 25% advance(not option premium but advance), and can have only one minimum conversion price at allotment time-that fixed by the SEBI DIP guidelines.
- If we want to encourage the long term informed investing culture, LEAPs are good because it could make investors bet on long term trends and their awareness of stock specific factors.
- Insider information could be used much better, because insiders can trade on LEAPs(provided they hold it to maturity/for atleast fixed period post silent period of trade) without affecting the share price, yet they could provide valuable pricing signals.
Monday, February 6, 2012
The case for SEBI to permit traded long term listed equity options(LEAPs)
With Indian equity markets still inefficient, there is ample value for active investing strategies. In that regard, long term equity options would be a great vehicle, also to give more impetus to activist long term investors who cannot adopt leveraged strategies. Abroad, LEAPs( Long Term Equity Anticipation Security) exist to allow investors to take a long term call on stocks(either put or call). As Keynes rightly said(and firms like LTCM/Lehmann realized), the market can stay irrational for longer than you can stay solvent. Even a three month option is quite risky for an investor, but for a long term option(say 1yr/2yrs), there is reasonable hope for market prices to correct by then.