It provides ample liquidity and keeps the consequential cost of the trades quite low. The system ensures that the market has deep pockets and absorbs volatility. Critics say badla can be replaced with individual stock options and index futures. There are serious doubts whether it is safer or whether our markets are ready for it. Abroad, there are separate exchanges for derivates.
Liquidity is required even for the options and futures market, whether it involves money or shares.
Equity holding patterns of Indian companies show a concentration of shares in the hands of promoters and institutions. Public holding is highly fragmented. Writing of a stock option would essentially require underlying in terms of shares and empowering the holders to write such options. Naked options can, in fact, be more dangerous than our traditional blank sales. Margin mechanisms are far more stringent and whether our stock exchanges are equipped for options trading is anybody s guess.