Retail interest drives up NSE option volumes to record highs

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MUMBAI : A spurt in retail participation from homemakers to students to small businessmen has pushed index options trading on the National Stock Exchange to record levels, with some broking houses reporting a 20-30% rise in derivatives volumes in the current fiscal year.

In the five months to 31 August, the average number of contracts traded a month has surged more than two-and-a-half times to 2.76 billion from 1.04 billion in the year earlier.

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At this rate, 2022 appears to be on pace to become a record year for options trading. Options contracts give traders a way to make money by betting on the direction of a market swing and become especially attractive when markets are choppy as they are now. But trading in options is riskier than stocks, especially for those trying their hands for the first time.

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NSE’s client category, which includes retail investors, accounted for the bulk of index contracts traded, dwarfing categories such as domestic institutional investors (DIIs), foreign institutional investors (FIIs) and proprietary or prop traders (when banks or brokerages trade using their own money).

Outstanding buy or long positions of the “client” category—comprising high net worth individuals (HNIs), retail and corporate—on index calls stood at over 2.2 million contracts as of 2 September, way above FII longs at 307,000 contracts, prop traders at 780,000 and DIIs at a minuscule 719 contracts. Similarly, on option puts, the client category accounts for almost 2 million contracts against FIIs’ 420,000 and prop traders at 820,000 contracts.

At the basic level, options are just contractual agreements between buyers and sellers that give buyers the right, but not the obligation, to buy or sell a certain asset, depending on whether it is a call or put contract.

“The NSE data reflects the rising retail participation on index options as a more cost-effective hedge tool than riskier futures and stock options, and one which helps them take an informed view on the market,” said Kamlesh Shah, president, Association of National Exchanges Members of India (ANMI), comprising NSE, BSE and MCX broking members.

To put it in perspective, a 17,600-strike weekly call option on Nifty would cost 6,250 per contract (50 shares) to a buyer at closing on 2 September, against 88,000 for buying or selling one futures contract at the closing price of 17,563.

Shah, also the joint managing director of Share India Securities, said college students, housewives, small businessmen and IT professionals are dabbling in options even as other investment avenues such as fixed deposits offer around 6% against 12-13% potential returns from stock markets. “Many of these new investors tend to buy rather than sell options as the risk in buying is limited (to the premium paid to the seller) while returns can be potentially in the low teens,” said Rajesh Palviya, technical head at Axis Securities. He puts those who dabble in options in two buckets—those with limited capital and those in the early stages of the learning curve.

Palviya said options volume at his firm jumped by a fifth, courtesy the rising retail share in the overall pie. Others like Sudhir Joshi, executive director at Khambatta Securities, said rising market volatility has contributed to the popularity of options.

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