Surge in Nifty option volatility last week likely on regulatory radar
Summary
- Index contracts traded on 5 December, a day before the RBI policy statement, exceeded volumes on the day of the Lok Sabha election results.
The advent of single-expiry index options last week introduced a fresh layer of volatility to the Nifty, which witnessed dramatic price swings a day ahead of the Reserve Bank of India’s bi-annual policy announcement on 6 December. The unusual gyrations likely caught the attention of regulators, including the Securities and Exchange Board of India (Sebi) and stock exchanges, which act as the first line of oversight, according to derivatives analysts.
Traders, previously focused on the now-discontinued weekly Bank Nifty options, appeared to double down on Nifty contracts, driving the volatility, analysts noted.
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"With multiple index option expiries behind us , it looks like traders specialised in trading weekly Bank Nifty option contracts shifted to the Nifty on Thursday , before the RBI meeting, causing option prices to swing wildly," said Rajesh Palviya, senior vice president and head of technicals & derivatives at Axis Securities.
Palviya believes that regulators will closely monitor whether this was a one-off event or indicative of a pattern.
The shift in trader activity was evident in the trading volumes. Data from the National Stock Exchange (NSE) shows that the number of index options contracts traded last Thursday soared to 82.34 crore, significantly higher than the 53.8 crore contracts recorded on 4 June, the day after Lok Sabha election results showed the Bharatiya Janata Party falling short of a standalone majority.
Notably, while the market had tanked 1,379 points to 21,884.5 on 4 June, it subsequently rallied 20% to a fresh high of 26,277.35 by 27 September.
On 5 December, a day before the Reserve Bank of India (RBI) held policy rates steady for 11th consecutive time, the Nifty swung 562 points between an intraday high of 24,857.75 and a low of 24,295.55 before closing at 24,467.45, just 10 points above its previous close. Despite the smart intraday recovery, option prices fluctuated wildly, leaving both buyers and sellers scrambling.
A widely circulated social media post by a Sebi-registered research analyst encapsulated the day’s volatility. The analyst noted that the Nifty 24,600 strike put option expiring on 5 December surged from ₹5 to ₹267 in a mere nine minutes through 2:58 p.m. as the index dropped from its high. By 3:15 p.m., as the market rebounded, the same contract had plummeted to just ₹0.05.
"The reason for the higher volatility last week was increased participation by option traders used to playing (the now discontinued) Bank Nifty weekly options ahead of the RBI policy meeting ," said the derivatives research head at a large broking outfit on condition of anonymity. "The huge volatility would have come on the regulatory radar , given its recent directives aimed at curbing retail frenzy in options trading. A possible increase in margins for in -the -money strikes can't be ruled out."
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An in-the-money call option is one where the strike price is below the current market price (CMP), while an in-the-money put option has a strike price above the CMP.
The heightened volatility reflected the market's attempt to second-guess the RBI committee's actions a day ahead of the policy announcement.
A Sebi official did not respond to a request for comment.
Regulatory concerns amid retail losses
The volatility aligns with broader concerns by Sebi about individual traders facing significant losses in weekly index options. A study by the regulator found aggregate retail losses exceeded ₹1.8 trillion over three years through FY24.
To curb retail frenzy, Sebi introduced measures on 1 October, including increasing option contract sizes to ₹15–20 lakh (from ₹5–10 lakh), rationalizing weekly expiries to one per week per exchange, and hiking extreme loss margins on the day of weekly expiry.
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These changes have shifted volumes from Bank Nifty options to Nifty options, analysts said. While the NSE opted for weekly Nifty expiry contracts, the BSE has chosen Sensex contracts for its weekly expiries.
Sebi directed exchanges to cease the launch of new weekly expiry options—except for one—effective 20 November. Existing weekly contracts, including Bank Nifty, Finnifty, Nifty Midcap Select, Nifty Next 50, and BSE’s Bankex, would be allowed to run their course until expiration. After this date, exchanges are permitted to launch only new Nifty and Sensex weekly options.
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