Volumes in the derivatives segment on the National Stock Exchange have, over the past few years, been seven to eight times higher than that seen in the cash segment. In the last six months for instance, the daily average turnover in futures and options has been Rs 1.29 lakh crore while the turnover in the cash segment has averaged 15,000 crore. Moreover, within the F&O space, options have now taken the centre stage, accounting for the lion?s share of volumes.
Says Ravi Narain, CEO and MD, NSE, ?In the initial days, contrary to the global trend, in India options accounted for barely 25% of the total turnover in derivatives. That was because options, being anon-linear product are harder to understand whereas futures were a simpler product. Today, volumes are higher in the options segment and that?s a healthy trend because they are safer product given that the downside is limited.?
A glance at the data show that since 2007, Index options have become the most popular instrument with their contribution to the average daily turnover, of the F&O space, rising from close to 12% in 2007 to 58% in 2010. This jump is accompanied by a simultaneous decline in the contribution of average daily volume of stock futures to the total derivatives volume from close to 55% in 2007 to 20% in 2010. What has caused this change is the fact that traders today are more familiar with option strategies. Moreover, as Savio Shetty, derivatives analyst at Prabhudas Leeladhar, points out, post the 2008 market crash, in which derivatives traders lost heavily because they were over-leveraged to stocks futures, many traders have switched to to index options to hedge their positions. Prior to the crash, in 2007, many traders hedged their cash positions by selling futures contracts which hurt them when prices started coming off.
The other reason for the shift is a change in the computation of the STT on derivatives trades, announced in the union budget for 2008-09.
While the STT was earlier calculated on the notional value of a traded options contract, since 2009-10, it is calculated on the premium of an option traded, which is a much smaller amount than the notional value. Consequently, the statutory cost of a transaction of an option instrument turns out to be ten times less.
According to T S Harihar, co-head, Institutional Derivatives, ICICI Securities, ?Since a large portion of the total derivatives trade is accounted for by proprietary desks of brokers, there has been a gradual shift towards using options to save on the total amount payable as STT on derivatives transactions. Traders prefer to use in-the-money options in place of futures, as they not only serve the purpose of futures instruments but also come at a lower statutory cost?.