With increasing number of derivative traders turning to index options in the past two years, the National Stock Exchange (NSE) has climbed to the second position among global exchanges in terms of the number of index options contracts traded in 2010.
The heightened activity in the index options market has also helped NSE to rise ahead of CME Group, NYSE Liffe Europe, Nasdaq OMX to become the fourth largest equity derivative exchange globally in 2010 next only to Korea Exchange, Eurex and CBOE. In 2007 NSE was ranked eighth among global exchanges, according to data available with World Federation of Exchanges.
Currently, options can be traded on five indices and options turnover as a percentage of the overall futures and options (F&O) turnover has steadily risen in 2010.
It has risen from about 50% in January to about 68% in December. Market experts point out that it was only after 2007 that options became popular among traders.
?Retail and high networth investors (HNIs) find trading derivative options more attractive as they are very easy and economical to trade in,? said T S Harihar, head of Institutional Derivatives at ICICI Securities. He also said that options attract Securities Transaction Tax (STT) only on the sell side, which is only a fraction of what is being charged on the futures trade.
?Apart from the cost-effective trade, investors also became aware of the effectiveness of options to hedge risk especially after the 2008 financial market crisis,? said Siddarth Bhamre, head of derivatives at Angel Broking.
Harihar said the popularity of options also increased with large overseas institutional investors adopting delta trading as a technique to generate market beating returns.
Interestingly, as per WFE data, NSE still is far behind other major exchanges when it comes to stock options. In 2010, it ranked eleventh in terms of total number of contracts traded on stock options segment. Lower volumes in stock options, according to market participants, is attributed to American-style stock options.
American-style options are those that can be exercised at the strike price anytime before or on the date of expiry of the respective contract.
Option writers face a greater risk in American-style options as the option can be exercised on any day before expiry of the contract which in turn increases the potential of a huge loss for the option writer.
Now, with NSE shifting to European-style options, which can be exercised only on the expiry of the contracts, market participants are confident about significant buildup of volumes in the stock options segment.
?Going forward, we can definitely see overall volumes in the stock option pick up as the European-style options will prompt option writers to come forward and participate in the market,? said Bhamre. There are currently 223 stocks on which F&O trades are permitted.