Retail investors in derivatives at record in August

The number of retail participants trading in derivatives on the National Stock Exchange (NSE) of India Ltd, the country’s largest stock exchange, hit a record in August. Market participants said the surge was fuelled by the growing popularity of relatively cheaper zero-day options, which expire daily.

The number of retail investors trading primarily index options on four out of five trading days on NSE hit a record 4 million, up from 3.7 million in July and well above the average 2.8 million per month in 2022-23, according to NSE data. With BSE launching Sensex options in May this year, there is an expiry every day of week. However, only the NSE investor count is being considered here.

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“Retail interest in zero-day options has been increasing and has hit a crescendo so far this fiscal (2023-24) with markets breaking out of the December high,” said Chandan Taparia, vice president (derivatives and technical research), Motilal Oswal Financial Services Ltd (MOFSL). “The popularity of daily index options is evident in BSE also launching weekly Sensex options from May this year.”

Options are instruments which facilitate the purchase or sale of underlying assets at a fixed price for delivery on a future date. As indices cannot be delivered, they are cash-settled.

In May this year, the Securities and Exchange Board of India (Sebi) directed all brokers to run a mandatory disclosure on their websites, as well as on each derivatives order, warning retail investors about the risks in derivatives trading.

Before punching an online order, investors must click on the “I Understand” button, which runs risk disclosures like “Nine out of 10 individual traders in equity Futures and Options Segment incurred net losses” and “On an average, loss makers registered net trading loss close to ₹50,000.”

However, the low cost of weekly options is becoming a “big draw” for retail investors, says U.R. Bhat, co-founder and director of Alphaniti Fintech.

“Zero-day options, available on all days of the trading week, tend to be cheaper than, say, monthly expiry options, so retail feels drawn to them on the grounds of low cost and on hopes of raking in unlimited gains. Many a time, they don’t understand that options lose value to time near expiry and that option sellers tend to be better informed and financially stronger than option buyers,” Bhat said.

MOFSL’s Taparia concurred. “It’s like if you win one day, you will use the spoils to trade on another option the next day, and if you lose, you will feel like making it up through a cheap trade the next day.”

For example, the Nifty 20,250 call option expiring on 21 September on Friday was worth ₹64 a share or ₹3,200 a contract (50 shares make one contract), while the 28 expiry contract (monthly) price for the same option was more than twice at ₹132 per share ( ₹6,600 a contract). In the first case, the maximum loss is restricted to ₹3,200. However, if the Nifty expires on 21 September at 20,500, the gain will be ₹9,300 per contract, or 190%, while the monthly contract will be just an 89% gain.

NSE first launched monthly index options in 2001. It launched weekly Bank Nifty options in 2016, followed by weekly Nifty options in 2019. In 2021, the bourse launched weekly options on the Nifty Financial Services Index (Finnifty) and the next year on the Nifty Midcap Select Index with 150 constituents.

Currently, the Midcap index options expire on Monday, the Finnifty on Tuesday, the Bank Nifty on Wednesday, and the Nifty on Thursday. In May, BSE revised the expiry of its weekly Sensex options to Friday from Thursday to gain traction as most investors and traders focused on the expiry of weekly Nifty and Bank Nifty options. Effective this month, NSE shifted the expiry of Bank Nifty to Wednesday and that of the Midcap Select to Monday.

Index options accounted for 98% of the notional derivatives turnover of ₹35,790 trillion in the fiscal year through 15 September.

The market share of retail in equity derivatives in 2023-24 (April-August) stands at 27%, behind proprietary traders at 58.6%, foreign portfolio investors at 5.9%, corporates at 3.6% and others at 4.7%.

Retail investors also traded big on the NSE cash market segment, with their count at 10.7 million, an 18-month high. This ties in with their net cash investment of ₹14,400 crore in August, after five straight months of net selling.

Updated: 18 Sep 2023, 12:27 AM IST