Traders cite lower cost for surge in trades.
In the last 14 months, when the stock markets have fallen consistently, volumes in options trading in the derivatives market have risen sharply.
At present, it is generating over 46.17 per cent of volumes on the National Stock Exchange (NSE), up from 10.46 per cent in January, 2008.
However, the actual value in rupee terms has fallen, reflecting the significant decline in the derivatives business.
That is, last January the monthly value of total trade was Rs 63,212 crore. Of this, options trading contributed Rs 6,609 crore. This February-end, the total trading fell to Rs 37, 493 crore and options trading has risen to Rs 16,925 crore.
Options trading is a strategy whereby the trader can buyôsell an underlying security. The buyer has the right, but not the obligation to purchase/sell a security at a set price (strike price) and within the contract period.
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Market experts attribute this sharp rise in the options trading to active participation of delta hedgers.
In options trading, delta is the measure of how the value of an option changes with respect to the change in the value of the underlying contract.
Delta hedging reduces the risk associated with price movement in the underlying asset by offsetting long and short positions.
Some of the top Mumbai-based stock broking firms are opting for this strategy by executing two sets of trades through delta traders.
“Traders were opting for delta hedging in options. The important advantage was that the statutory cost involved was quite low compared to futures trading, leading to higher returns,” said a dealer with a leading broking house. If trades are executed property then, delta hedging can generate returns as high as 15 per cent.
In case of futures trading, brokers demand as much as 30 per cent as upfront margins. On the other hand, in options trading the upfront margins is not based on the value of the underlying asset. Since only the premium of the contract needs to be paid, it could be as low as Rs 1, thereby reducing the cost for traders considerably.
In delta hedging, tra-ders buy both the call and put option at the same price, popularly known as the delta neutral trading strategy or a Long Straddle. In this situation, the trader stands to benefit, in case of a rise as well as a fall.
Another technique used by traders is the technique only option. Under this strategy, the trader buys at the bid price and immediately sells at the ask price. This creates a delta zero transaction. And the profits come from the bid/ask spread.
Given the success of delta-hedging, some brokers said that they are teaching derivative traders how to execute this trades successfully.