Index options trading swells to record high in Oct amid heightened uncertainty

The jump in participation comes weeks ahead of regulatory restrictions to curb retail frenzy in weekly index options trading.

October's heightened volatility led to greater participation, with the number of index options traded on the NSE hitting a record high of 12.74 billion contracts. The rising market uncertainty was reflected by fear gauge India VIX, which rose by 71.5% from a low of 9.47 to a high of 16.24 during the month.

The Nifty fell 6% in October to 24,205.35 due to foreign investors' record selling of over ₹1.13 trillion amid near-flat September quarter results, building tensions between Israel and Iran, and uncertainty over the winner of the US presidential race then.

As the markets turned volatile, falling from a record high of 26,277.35 on 27 September, participation increased in indices such as the Bank Nifty and the Nifty, the two most popular index options contracts among market constituents, surged, according to market investors.

“More trades tend to happen when markets turn volatile," said the head of a large discount broker. “We believe, though, the Sebi (Securities and Exchange Board of India) restrictions, which kick in on 20 November, will trim the volumes by around 15-20% even as the volatility spills over from the last month to this one."

Independent market analyst Ambareesh Baliga agreed. “At times when markets turn volatile, trading increases. With Donald Trump in the saddle, news flows will give rise to more volatility. Still, small participants won't be able to trade as much as they would have liked due to regulatory curbs on derivatives trading," Baliga explained.

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Trump wants to keep interest rates low and cut corporate and personal tax rates to boost spending while raising tariffs on imports from China and other markets. This could stoke inflation in America and heighten bond yields, especially as the government borrows more to fund its expenditures. In such a scenario, keeping policy rates lower would be counterproductive, according to market analysts.

VIX currently trades at 14.47, and the Nifty has slipped one-fifth of a percentage point in November to 24,148.20. VIX tends to cool off after an impending event, like the US elections, plays out.

In index options, based on premium turnover, the NSE in October had a market share of 87.3% ( ₹62,156 crore average daily turnover), with BSE holding the rest during the month.

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Sebi curbs

Sebi's restrictions on options trading include increasing the contract size of indices like the Nifty by three times to ₹15-20 lakh, cutting the number of weekly index option expiries to just one per exchange from five earlier, and increasing the extreme loss margin by 2% on the expiry day of options, which will take effect from 20 November. 

Analysts estimate that this will take the total margin to trade to 14% from 12% earlier on the expiry day, which happens to be Thursday for weekly and monthly Nifty contracts.

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The market regulator announced six measures in a staggered form on 1 October after several Sebi studies found that nine out of 10 individual traders lost in futures and options trading and that loss makers continued dabbling despite suffering heavy losses.

The three most important ones will be effective from 20 November, while two others—upfront collection of option premium from buyers and the removal of calendar spread benefits on expiry day—will be implemented from 1 February, and intraday monitoring of position limits will take effect from 1 April 2025.

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