The trading volumes of options on Indian equities have surpassed those on Wall Street stocks, as retail investors flock to short-term bets on the country’s booming benchmark index. The notional value of options on India’s Nifty 50 index has grown to an average of approximately $1.64tn a day this year, compared to the S&P 500 index’s average of $1.44tn. Much of this growth is driven by zero-day options, popular among retail traders for betting on short-term market movements.
Lars Näckter, head of Asia Pacific equity derivatives research and quantitative investment strategy at Bank of America, describes India’s options market as “mad” with a rush of participants seeking to get involved. Options contracts give investors the right to buy or sell an asset at a fixed price by a given date. While the total number of outstanding option contracts on the Nifty 50 index is still lower than the S&P 500, the Indian market is characterized by very short-term trading driven by the accessibility of cheap trading apps and online influencers.
The accessibility of futures and options trading has attracted millions of young, increasingly affluent Indians into playing the stock market in pursuit of significant gains. Zero-day options have emerged as the most popular derivative among retail investors, especially since their introduction in 2021. The recent bull market has only bolstered the appeal of these derivatives, with the Nifty 50 hitting record highs and then experiencing sharp sell-offs based on political developments.
The rollout of low-commission trading apps has led to a “gamification” of India’s stock market, according to a report by Axis Mutual Fund. The number of active derivatives traders in India has surged from less than half a million in 2019 to 4 million by last year. Short-dated options offer leverage that amplifies potential gains or losses from small bets, making them attractive to investors. Regulators are starting to take notice, with warnings about the high rate of losses among options traders.
Despite warnings of potential losses, volatility-focused global hedge funds and proprietary trading firms are attracted to India’s options market due to the significant retail interest. Such firms account for nearly half of Nifty 50 option turnover this year. US high-speed trading firm Jane Street filed a lawsuit alleging former employees had taken a profitable trading strategy focused on India’s options market to hedge fund Millennium Management, highlighting the lucrative opportunities available.
While the influx of retail investors into India’s options market has driven volumes to unprecedented levels, concerns of market stability and the potential for significant losses loom. With the rise of social media influencers luring individuals into trading and the gamification of stock market investing, regulators and industry experts are closely monitoring the situation. The accessibility and popularity of short-term options trading among young Indians have reshaped the dynamics of the market, attracting both retail investors seeking quick gains and large proprietary trading firms looking to capitalize on the increased interest.
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