During the week ended 6 December, the first week under the new regime of just two weekly expiries, the number of index options traded plunged 30%, data from the National Stock Exchange (NSE) and BSE showed. While 3.04 billion weekly Nifty and Sensex and monthly expiry Bank Nifty and Finnifty options were traded in the week ended 29 November, when each day saw a contract expiry, the number fell to 2.14 billion the following week ended 6 December.
Though the number of contracts traded was sharply lower, the premium turnover for the week was marginally higher. The reason: The huge participation in Nifty weekly contracts on 5 December, a day before the monetary policy announcement.
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Why premium turnover rose
Thanks to this policy-related spike, NSE’s premium turnover for the week ended 6 December was 3.4% higher at ₹2.73 trillion, compared to the preceding week’s ₹2.63 trillion. The data break-up for Sensex options was unavailable.
On 5 December, the number of index contracts traded on NSE jumped to 823.4 million, a spike typical of days that see sharp market movements.
Earlier, a similar surge was seen on 5 June, when an unusually high 865.4 million contracts were traded. That was when the Nifty rallied over 3% after the National Democratic Alliance retained power in the Lok Sabha election for a third straight time. To be sure, back then, weekly Bank Nifty contracts were also traded, as opposed to only Nifty weekly being traded on 5 December.
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The October crackdown
On 1 October, the Securities and Exchange Board of India (Sebi) announced a set of six measures to curb options volumes in light of huge losses incurred by individual investors. A Sebi study found that 93% of individual traders suffered aggregate losses of ₹1.8 trillion during FY22-24. Most of these trading losses were incurred playing index options.
Overall, fewer contracts traded in the week ended 6 December show the impact of discontinuing multiple expiry contracts, market experts said.
While Sebi directed that a stock exchange can launch just one index option expiry a week after 20 November, it allowed existing weekly contracts, including Bank Nifty, Midcap Nifty, Finnifty, Sensex 50 and Bankex 50 to expire between 13 and 19 November.
However, as the monthly contracts of the weekly variants expire on different days of the last week of a month, this would have defeated Sebi’s directive of a single expiry per exchange per week. This is what was seen in the last trading week of November (25-29).
Consequently, NSE and BSE late last month revised their monthly option expiries (Bank Nifty, Bankex, etc.) from different days of the week to Thursday and Tuesday of last week, respectively. These expiries will coincide with the weekly expiry of Nifty (Thursday) and Sensex (Tuesday).
Taking effect
“The Sebi measures to curb the options frenzy have begun with two of the six measures having gone live from 2 December,” said Ashish Nanda, president and head of digital business at Kotak Securities.
“Two weekly contracts are being traded every week as against six weekly contracts in November. As other curbs like the increase in contract size take effect, we expect a further rationalization of volumes.”
The Nifty’s weekly contract size will increase to 75 shares from 25 shares from 2 January, while the Sensex lot size will increase to 20 shares from 10 currently from 7 January.
Currently, two of the Sebi measures—single weekly expiry and increase in extreme loss margin by two percentage points to 14%—are in effect. Beginning January, the contract size will be revised, followed by the removal of calendar spread benefit and upfront collection of options premium from 1 February, and intraday monitoring of position limits, from end of day monitoring, from 1 April.
Rajesh Baheti, managing director, Crosseas Capital, said a “clearer picture” on the impact on volumes due to the Sebi measures would emerge after three months. He doesn’t rule out volumes from discontinued weekly contracts shifting to Nifty and Sensex contracts.
