Record Highs in Option Volumes

The surge in option contracts coincided with the Bank Nifty hitting new highs and the Nifty also seeing substantial growth.

• The surge in index options volumes led to total derivatives volumes reaching a historic 5.75 billion contracts in May 2023.
• Proprietary traders and individual investors dominated index options trading, contributing to 98% of total derivatives volumes.
• The Securities and Exchange Board of India has instructed brokers to emphasise the risk associated with derivatives trading to protect retail investors.
• Recent studies indicate that nine out of 10 individual traders in the equity futures and options segment suffered net losses.
• The affordability of options compared to futures is a major factor driving their popularity.
• Experts caution traders about the risk of time decay, a common occurrence in options that option sellers charge.
• In addition to time decay, transaction charges also contribute significantly to the total cost.
• The participation of Foreign Portfolio Investors (FPI) has also boosted cash turnover in derivatives.

Derivatives:

• A derivative is a financial contract that derives its value from the price of an underlying asset.
• A derivative is a contract between two or more parties whose value fluctuates based on changes in the value of the underlying asset.
• Futures and Options are two types of derivative instruments.
• The leveraged nature of derivatives amplifies both their risks and rewards.
• Futures and options are financial derivatives that allow traders to speculate on the price movements of an underlying asset without actually owning it.
• Futures contracts bind the buyer to purchase an underlying asset, while the seller is obligated to deliver it at a predetermined price and date.
• In options contracts, the buyer has the right, but not the obligation, to buy or sell the underlying asset at a predetermined price and date. If the buyer decides to exercise their option, the seller must fulfil the contract.