The National Stock Exchange (NSE) has become a hot spot for options traders. In the equity derivatives segment, the market share of the futures segment has gone down, while that of options is gaining.
The market share of stock options in NSE's derivative segment rose from just two per cent last year to nearly 7.5 per cent this October. Stock options on the NSE generated an average daily volume of Rs 9,600 crore in October. Comparatively, the average daily trading volume in the index futures segment fell from around Rs 20,000 crore last year to Rs 10,000 crore in October.
NSE says it has been creating awareness among brokers for options trading, less risky than the futures segment. “The volumes started picking up since we started discussing the advantages of stock options with brokers,” said a senior NSE official.
The leverage in futures is a lot higher than that 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 the options segment is higher than those of futures.
When one buys stock options, the maximum loss to be sustained is the amount of money used in purchasing these. For instance, one bets only on the premium of the underlying product in options. 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 the daily loss amount, called “margin call”.
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Both NSE and the Bombay Stock Exchange have been among the top rankers in the world this year, on 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 this period in index options trading.
The spurt in options volumes has been noticed mainly during corporate events such as company results. Among the key attributes of stocks doing well in the stock options segment, say NSE officials, is high beta and volatility.
While NSE charges Rs 5,000 for Rs 1 crore of options turnover, BSE takes just Rs 50. NSE had lowered the trading cost in the futures & options (F&O) and 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 the NSE. The BSE, on average, generates around Rs 20,000 crore of derivative volumes aided by incentive schemes.
The new MCX stock exchange has set its transaction charges at least 50 per cent lower than NSE.
However, say experts, equity trading in India is highly speculative. As much as 90 per cent of the volumes are concentrated in the derivative segment, less understood by retail investors. On average, the NSE generates around Rs 1.3 lakh crore worth of derivative volumes. Brokers say exchanges need to launch products that could encourage retail participation, as derivatives are mainly for hedging. Retail investors might better understand products where there is downside risk clarity, say experts.