Indian Options Get Boost as Stakes Rise in Derivatives Trade

  • Contract size raised to 500,000 rupees from 200,000 rupees
  • Options turnover four times that of futures so far in 2015

Options trading in India, the biggest segment of the equity market by turnover, is poised to get a further boost as higher liquidity and lower initial costs make them more attractive than futures after the regulator raised the value of derivative contracts.

The Securities & Exchange Board of India, which ordered stock exchanges in July to increase the minimum contract size to 500,000 rupees ($7,711) from 200,000 rupees starting November, could prompt investors to choose options over futures, according to brokerages K.R. Choksey Shares & Securities Pvt. and Arihant Capital Markets Ltd. The National Stock Exchange of India Ltd., the country’s largest, has tripled the lot size for Nifty derivatives for November delivery.

“Institutions will shift from futures to options due to higher liquidity and lower costs,” Deven Choksey, the Mumbai-based managing director at brokerage KR Choksey, said by phone. “Overseas investors have already been switching to options.”

The SEBI order, which the regulator said is aimed at protecting investors’ interests, comes as turnover in futures and options is more than 14 times as much as cash equities on the NSE. Within derivatives trading, options represent the biggest segment, with an average daily turnover of about 2.09 trillion rupees ($32 billion) in 2015 through Friday, compared with 514 billion rupees for stock and index futures.

The NSE has tripled the lot size of the November derivative contracts to 75, from 25 through October. The November futures contract, excluding brokerage and other levies, had a notional value of 623,400 rupees as of 3:42 p.m. in Mumbai, compared with 206,854 rupees for October futures, according to data compiled by Bloomberg. Investors typically are required to put up between 7 percent to 10 percent of the contract’s notional value as their initial investment.

By comparison, the Nifty 8,700 call, the most popular November options contract, cost around 2,426 rupees.

Options Risk

While the initial investment per contract is lower in options than in futures, the risk need not be, according to Ravi Sharma, a derivatives strategist at Prabhudas Lilladher Pvt.

“The losses can be more severe and unpredictable in options than in futures,” said Sharma. “Retail investors may not shift all of a sudden. May be over a course of time, there may be some shift.’’

Indian futures and options contracts expire on the last Thursday of each month, with the October derivatives, the last contracts with the lower lot size, due to lapse on Oct. 29.

Anita Gandhi, a director at Mumbai-based Arihant Capital, said she was cautious amid the transition to a higher lot size. Still, overseas investors have recently increased their options activity and “small traders may prefer to shift to trading more options due to lower margin requirement,” she said.

The India VIX index, a measure of demand for protection against stock-market swings, climbed 3.7 percent to 16.88. The 50-stock CNX Nifty Index rose 0.5 percent to 8,275.05.

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