On multiple reports of options volume exceeding cash volume in the Indian market, Nitin Kamath, co-founder and CEO of leading online stock brokerage, Zerodha, on Monday said, looking only at volumes and unique users should not be misleading. Could Nitin said, over the past two years, the increase in options trading volumes has been due to intraday stock traders switching to the F&O segment.
via his twitter handle, Nitin Said, “The news headlines scream that the volume of options outweighs the volume of cash.
He said, “The boom in options in the last 2 years is mostly due to intraday stock traders switching to option intra day Leverage restrictions in early 2021.”
In a thread, Nitin, 10% of active traders contribute 90% of the trading volume, mostly in intraday cash and F&O.
“Comparing the business of traders with that of equity investors is like comparing apples to oranges or brinjals,” he said.
Till 2021, Nitin explained that brokers can offer as much intraday leverage as they want. “It made trading stocks attractive,” he said.
But once the maximum leverage was capped at 5X, he said, “intraday traders switched to F&O given the ability to hold shorts and leveraged positions overnight.”
Thus, F&O volumes grew faster than cash volumes, he said, “because the most active traders switched to F&O. But if you look at unique traders, equity as a percentage remained much higher than F&O.” happened.”
But Nitin also said, “Yes, F&O participation has increased, but equity has increased much more.”
Furthermore, Nitin believes that there is another regulatory reason behind the increase in retail contribution from 27% to 36%.
He highlighted that in March 2020, due to COVID-induced volatility, notional F&O risk at client level was capped at value 500 crores to mitigate the risk.
Accordingly, he said, “It reduced the position limit for institutions in derivatives 500 crores or ~6000 lots Nifty, which restricted the trading volume to others except retail. I think this is the reason why retail % contribution in derivatives has increased in last 3 years.”
Finally, he concludes, “In this post, I explain why you shouldn’t just compare trading volumes and conclude that speculative activity is abnormally high because options trading volumes are at an all-time high.” . It’s important to track participation by unique users. Also.”
Here is the thread of his tweet:
Know your inner investor
Do you have guts of steel or are you a victim of insomnia regarding your investments? Let’s define your investment approach.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.