Mumbai: Retail investors’ growing fancy for weekly options trading has reached staggering proportions with the whole of last year’s futures and options (F&O) volumes set to be surpassed in less than seven months of the current financial year.
The interest in FY24 persists despite massive losses by individuals, and subsequent warnings by the regulator that F&O trading causes nine out of 10 participants to lose their shirts. The market rally since March and zero day options — availability of options that expire each day of week — have been key attractions.
Total number of contacts traded on the National Stock Exchange’s (NSE) equity derivatives segment is 41.41 billion in just over six months of FY24 , which is within striking distance of the record 41.76 billion contracts traded in the whole of FY23.
So far this financial year , index options’ trading accounts for 98.3% of total trades or 40.71 billion contracts , surpassing the last fiscal record of 40.54 billion contracts to hit an all-time high.
“Retail interest in options trading has picked up with cheap, zero-day options catching their fancy,” said Jayesh Bhanushali, lead research, IIFL Securities. “This frenzy will continue with daily option expiry and the lack of understanding for the technicality of trading in such instruments.”
High deliverable volumes in cash market since the latest leg of the market rally beginning in March, has also fuelled retail interest. NSE data showed retail investor count on its derivatives segment hit a record of 4 million in August, up from 3.7 million in July, 3 million in June , and an average 2.8 million in FY23. The September figure is awaited.
Cash market delivery volume as a percentage of traded volumes have jumped to 20.46-25.19% so far this fiscal year from 17.98-20.61% in FY23, on the back of the bull market rally in mid-cap and small-cap shares. The significant rise in volumes means that those holding these shares can put them up as collateral against the cash margin requirement to sell options.
Many investors besides retail meet exchange cash margin requirements for selling options with underlying shares they hold in demat form, thanks to rise in delivery, said Amit Gupta, senior vice president and fund manager, ICICI Securities. “It helps them increase their return on investment, thanks to rising share price besides the premium earned from selling options.”
A buyer of an option typically pays premium to the seller, who takes greater risk as her losses can be unlimited, while the maximum risk to the buyer is loss of premium. Sellers of options are proprietary traders and high net-worth individuals, or HNIs, and buyers are mostly retail investors. Index options, unlike shares, are settled in cash. “It’s normally the seller who wins most of the time. The buyer mostly loses,” added Bhanushali.
Low volatility led options to be cheaper as implied volatility or extent of price swings is key to options pricing, he said. But, time decay is another price determinant which is not understood by retail investors. Therefore, despite low price of options due to low volatility, buyers are not able to make money. “As sellers take more risk, they invariably are better informed and more astute than buyers. That is why they gain most times,” said Rajesh Palviya, derivatives head, Axis Securities.
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Updated: 08 Oct 2023, 11:10 PM IST