Nifty options volumes surpasses US S&P 500 as retail participation soars

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Key reasons attributed to this meteoric rise in options volumes include the increasing use of algorithmic trading, daily index options weekly expiry, and increased retail participation.

Almost nine out of 10 retail investors may be losing money on derivatives trading. But this statistic is not deterring hopefuls from taking a short at the game.
The notional value of options on India’s Nifty 50 index has averaged about $1.64 trillion a day this year, surpassing the average daily volumes of $1.44 trillion on the S&P 500 index, according to data from Bank of America research.

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According to NSE data, retail investors accounted for 35.6 percent of the premium turnover in index options in April this year. They also accounted for 25.5 percent of the notional turnover across the derivatives segment (futures plus options) in the same month.

The growing popularity of weekly options, rise in the number of algo trading firms, contracts expiring every day of the week, and a shot at making huge gains without risking a lot of capital and by paying much lower margins than for cash market trades, are some of the factors driving the explosive growth in options trading.

With the NSE and BSE locked in a race to boost derivatives trading turnover on their respective platforms, the result has been an increase in the number of contracts available for trading over the past few months.

Hero Zero trades

Many retail traders are increasingly going for what is known as Hero Zero trades, which means betting on out-of-the-money call or put options on expiry day for a low price. This strategy pays off handsomely if there is a sharp move in the underlying. But if the underlying trades in a narrow range, the premium paid for buying the options is forfeited.

Seasoned derivatives traders say most people consistently lose money in buying expiry day options, but the occasional profit tempts them to stay on, in the hope that they may make an even bigger profit next time.

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Also, the rush of amateur retail traders is turning out to be an opportunity for proprietary trading firms using powerful algorithms.

Recently during a court hearing in the US, quant firm Jane Street claimed it earned about $1 billion in revenues in options trading in India in 2023, from one of its proprietary strategies, according to a Bloomberg report.

“A key reason for the surge in options trading volumes is the proliferation of algo trading,” said Rajesh Palviya, Head of Derivatives and Technical Research at Axis Securities.

“Secondly, the availability of various index options weekly expiry gives intraday traders more choices with different magnitudes. The growth and advancements of high-speed mobile apps have contributed remarkably, especially appealing to Gen Z,” he said.

The scope of the frenzy in India is illustrated by the number of options contracts traded, which grew at a CAGR of 52.4 percent from 2013 to 2023, according to a recent Bloomberg report. In comparison, the US, the nearest competitor, saw a mere 10.7 percent growth. India now trades nearly eight times more options contracts annually than the US.

Also read: F&O Manual | Indices trade near all time high; Nifty faces immediate resistance at 23,500
The total notional value of index options traded in India in FY24 was just under Rs 80,000 lakh crore ($907 trillion), more than doubling from Rs 38 lakh crore ($448 trillion) traded in the previous year. For perspective, the size of India’s GDP is estimated at $3.7 trillion for the fiscal year, and the combined market capitalization of all listed companies in India is around $4 trillion.

However, as measured by so-called open interest, the total number of outstanding option contracts on the Nifty 50 index is still far below that on the S&P 500, indicating the greater depth of the US options market and the very short-term trading that defines the Indian market.

Short-dated options are generally cheaper than index-tracking exchange-traded funds and provide investors with large amounts of leverage, massively amplifying potential gains or losses from relatively small bets.

Hedge funds and prop traders account for just under half of Nifty 50 option turnover so far this year, Bank of America data shows.

“Recently we had a big mega event of Loksabha election from a market perspective, which has also contributed to the rising volumes as more participants had placed their bets. The decreased lot size of Indices have also augmented for more participation as the margin requirements for the same had reduced,” added Palviya.

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