The National Stock Exchange (NSE) has become a hot spot for 'options traders'. In the equity derivative segment, the market share of futures segment has gone down while that of options is gaining further ground.
The market share of stock options in NSE's derivative segment rose from just 2 per cent last year to nearly 7.5 per cent in October, 2012. In October, stock options on NSE generated an average daily volume of over Rs 9,600 crore. Comparatively, the average daily trading volume in index futures segment on NSE fell from around Rs 20,000 crore last year to Rs 10,000 crore in October.
NSE says, they have been creating awareness among brokers for options trading, which is less riskier than futures segment. "The volumes started picking up since we conducted meetings with dealers and brokers to make them aware of various stock option trading strategies," said a senior NSE official.
Leverage in futures is a lot higher than the leverage in stock options due to the much higher lot size and low margin requirement. This makes futures trading riskier than options trading in terms of potential losses due to leverage. Globally too, the market share of options segment is higher than that of futures.
When one buys stock options, the maximum loss to be sustained is the amount of money used in purchasing those stock options. For instance, one bets only on the premium of underlying in options segment. When things go wrong, and stock options become worthless, one can lose no more than what was bet on the premium of the stock.
However, in futures trading, traders are exposed to unlimited liability and will be made to top up on ones trading account with the daily loss amount in what is called a "margin call".
Both NSE and BSE have been among the top ranker's in world this year on the back of strength in options trading. In 2011, NSE was behind CME Group, Eurex and RTS of Russia in terms of index futures trading and was in the second place during the same period in index options trading.
Spurt in options volumes has been noticed mainly during corporate events like company results and other significant announcement. Among the key attributes of stocks doing well in stock options segment, say NSE officials, is high beta and volatility.
While the NSE charges Rs 5,000 for every Rs 1 crore of options turnover, BSE takes a measly Rs 50 for the same. The NSE had lowered the trading cost in the futures & options (F&O) and the cash segments by 10 per cent in September 2009. This had resulted in a major spurt in options trading volumes, from around 10 per cent of all derivative trades to 45 per cent on NSE. In response, BSE had lowered the membership fees on its platform by 90 per cent to Rs 10 lakh in 2010. The BSE on an average generates around Rs 20,000 crore worth of derivative volumes, which are aided by incentive scheme.
The up coming MCX SX, which will soon launch equity trading operations, has set its transaction charges at least 50 per cent lower than NSE.
However, market experts say, equity trading in India is highly speculative as 90 per cent of volumes are concentrated in the derivative segment, which is less understood by retail investors. On an average, the NSE generates around Rs 1.30 lakh crore worth of derivative volumes. Brokers say exchanges need to launch products that could encourage retail participation and investment scenario as derivatives are mainly for hedging purpose. Retail investors may better understand products where there is downside risk clarity, say experts. The NSE follows cash based settlement system while the BSE follows delivery based settlement mechanism.