Options volume hits record high; forms 97% of F&O contracts traded in FY22

Trading in the options segment of the exchanges has touched a record high this year, led by factors such as the entry of new individual traders amid the Covid-19 pandemic, an uptick in margins in the futures segment, increased activity from algo traders, and the weekly expiry cycle.

The number of contracts traded in the options segment in FY22 so far makes up over 97 per cent of the total futures and options (F&O) contracts, with action largely concentrated in the Nifty and Bank Nifty index options. This figure was about 83 per cent five years ago.

Market observers believe that most of the money deployed for such trading is speculative and bet on the direction the Nifty will move in a particular week. More than 90 per cent of the retail or small traders are losing money this way, which does not bode well for the long-term equity culture in the country, they said.

“Options volumes have gone through the roof and will only grow,” said Rahul Rege, head (retail), Emkay Global Financial Services. “A lot of retail investors now prefer options over futures,” Rege said. 

“Besides, a lot of wealthy individuals are investing in the segment through algo-based strategies through their family offices or through select algo traders,” Rege added.

The margin requirement for the futures segment has risen substantially after the introduction of peak margin norms last year. In the cash market, too, leverage offered by brokers for intra-day trading has reduced from 8-10 times to 2-3 times.

“Trading in futures requires initial margin and then mark-to-market margins if the position turns unfavourable. Option buyers just need to pay the premium, which is the maximum risk they take, while option sellers can use their investment portfolio as collateral against margin requirements. This is the key reason that new smart traders prefer options over futures,” said Chandan Taparia, derivatives analyst at Motilal Oswal Financial Services.

For buying one lot of Nifty futures, investors will have to shell out Rs 81,500 on a contract size of Rs 8,15,000, assuming a 10 per cent margin requirement if the Nifty is at 16,300. On the other hand, for buying deep out-of-the-money call or put options of the Nifty trading at Rs 2, investors will have to pay just Rs 100.

The introduction of weekly expiry in 2019 and the market momentum seen in the past year have also lured individual investors to the segment in the hope of making an easy profit.

“The options segment has become a game of roulette for small traders, who are betting as little as Rs 15,000-20,000 in the segment,” said B Gopkumar, CEO, Axis Securities, adding that most of the money flows in post 2 pm on Thursdays, the day of the expiry, in index options Nifty and Bank Nifty.

Experts said the same money should have ideally been invested in mutual funds through systematic investment plans or directly in the cash market in quality stocks.

“One segment constituting more than 95 per cent of market volumes is not a sign of a mature market,” said Siddarth Bhamre, director, alternative investments and research, InCred Equities. "Volumes have grown mostly due to speculation rather than hedging or actual strategy building. Traders are looking to double their returns in two or three days or a month but are losing their capital in most cases.”

Market observers, however, are enthused by the entry of serious market participants into the segment, some of whom are taking professional help to learn the ropes. “In absolute terms, more people may lose money because there is higher participation than before. However, there will be a significant number of strategy-based traders who will survive this cycle and flourish in the long run,” said Rege.