Retail traders push India stock option volumes above S&P 500


Trading volumes of options on Indian equities have eclipsed those on Wall Street stocks, as retail investors pile into short-term bets on the country’s surging benchmark index.

The notional value of options on India’s Nifty 50 index has grown to an average of about $1.64tn a day this year compared with average volumes on the S&P 500 index of $1.44tn, according to Bank of America data.

Much of the rise of India’s options market has been driven by so-called zero-day options, which are often used by retail traders to bet on or hedge against extremely short-term market moves. The popularity of these options, say analysts, highlights the froth in parts of the country’s booming stock market.

The country’s options market has gone “absolutely mad . . . there’s a real rush to get involved,” said Lars Näckter, head of Asia Pacific equity derivatives research and quantitative investment strategy at Bank of America.

Options contracts give investors the right to buy or sell an asset at a fixed price by a given date.

As measured by so-called open interest, the total number of option contracts outstanding on the Nifty 50 index is still far below that on the S&P 500, in a sign of the US options market’s greater depth and the very short-term trading that defines the Indian market.

Armed with cheap trading apps and encouraged by online influencers, millions of young, increasingly affluent Indians now play the stock market in search of outsized gains. Zero-day options have become by far the most popular type of derivative among the retail investor community since they were first made available in 2021. The recent bull market has only boosted these derivatives’ appeal.

The Nifty 50 hit a fresh record high on Monday after exit polls suggested Prime Minister Narendra Modi was on track to secure a thumping election win. 

Line chart of 1-month average daily index option notional traded (US$tn) showing Nifty options volumes surpass S&P 500 volumes

But early results on Tuesday pointed to a diminished mandate for the premier, sparking a sharp market sell-off. Nifty 50 option pricing last week suggested traders were overwhelmingly confident that Modi’s Bharatiya Janata party would win a landslide victory.

“Clearly the whipsaw and rapid rotation in the market hasn’t been good for too many peoples’ heart rates,” said another Indian banker. “It’s been a pretty tough three days for most of our clients.”

Abhay Agarwal, founder of boutique fund manager Piper Serica in Mumbai, said futures and options trading had become “so easy and accessible to small investors . . . Everybody has become too focused on the short term.

“People have just realised with a very small amount of money they can take very large bets, they don’t need a lot of money in the cash market and I think the whole country has figured out this is remarkable,” he added.

The rollout of low-commission trading apps has led to a “gamification” of India’s stock market, according to a 2023 paper by Axis Mutual Fund. it estimated that the number of active derivatives traders in India, most of whom are under 40 years old, had climbed from less than half a million in 2019 to 4mn by last year.

Short-dated options are generally cheaper than index-tracking exchange traded funds and provide investors with large amounts of leverage, massively amplifying potential gains or losses from relatively small bets.

Regulators are beginning to take note. Madhabi Puri Buch, chair of the Securities and Exchange Board of India, last year warned that about nine in 10 options traders lose money. 

“You’ve also had a massive rise of social media influencers, who are a big part of what’s been driving [rising retail investor interest],” said Näckter. “They’ve been luring people into trading.” 

One senior banker in Mumbai said options volumes had become “just insane”, adding that a slight sell-off in the broader market might be the only thing to deter more entrants and “prevent too many people losing too much money [further] down the line”. 

But volatility focused global hedge funds and other large proprietary trading firms have also flocked to India’s options market, believing the huge amount of retail interest offers a great opportunity to make money. Hedge funds and prop traders account for just under half of Nifty 50 option turnover so far this year, Bank of America data shows. 

US high-speed trading firm Jane Street in April filed a lawsuit alleging that two former employees had taken a lucrative trading strategy focused on India’s options market to hedge fund Millennium Management. 

Jane Street “dedicated years of time and capital to identify a latent economic opportunity in a specific market” that was later revealed to be India, according to documents filed with the Southern District of New York court.

During his time at Jane Street, one of the defendants stated that the trading strategy was “incredibly valuable”, according to the complaint.



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