Two weeks into the first phase of the Securities and Exchange Board of India’s (Sebi) measures to cool the futures and options (F&O) market, the action seems to have shifted to expiry days. While daily average volumes have seen a sharp decline, trading action has remained high on the two expiry days of the week.

Experts expect this trend to likely intensify going ahead, with both volatility and volumes being expected to further rise on these two days — Thursday and Friday.

Last Thursday, the National Stock Exchange (NSE) recorded its first full weekly Nifty 50 expiry since the new rules took effect, with daily average turnover rising four times to Rs 517 lakh crore, compared with Rs 136 lakh crore on other days. On the BSE, Sensex’s weekly expiry on Friday saw a 19-fold spike to Rs 111 lakh crore in value, leaving the rest of the week noticeably quiet.

In the two weeks since November 21, the combined daily average turnover on both the exchanges has fallen 21% to Rs 380 lakh crore, compared to the same time period a month ago, and 35% from two months ago.

This drop is primarily a result of the removal of certain weekly index derivatives — Bank Nifty, Nifty Midcap Select, BSE Bankex, and Nifty Financial Services indices — effective November 20. Traders now have fewer options to hedge or speculate, which has impacted market participation.

Dhiraj Relli, MD and CEO of HDFC Securities, said: “We believe that in the coming weeks, volumes on Thursday and Friday will be significantly higher than volumes before November 20, as volumes used to be distributed on weekly expiry every day in different underlying. Now, they will gradually shift to Nifty and Sensex expiry trades.”

With fewer choices in weekly index derivatives, traders are focusing on taking positions in strike prices closer to the spot market to generate similar returns with fewer expiries. This has also driven up market volatility, with implied volatility surging as traders anticipate higher risks, said experts.

For instance, Nifty 50 options on Thursday saw their prices closer to expiry rise to the highest level seen in at least a decade — excluding the pandemic period. Two hours before last Thursday’s expiry, the straddle was priced at 1.25% of the underlying, or about Rs 300 on a base of Rs 25,000. Typically, straddle prices this high were seen three days before expiry, which typically fell to Rs 100 only a few hours before expiry.

This unprecedented pricing of straddles at 1.25% of the underlying just hours before expiry hasn’t been observed in at least a decade, said Feroze Azeez, deputy CEO at Anand Rathi Wealth.

“Volumes on regular, non-expiry days have contracted as traders are using same margins to take positions closer to the spot market. This shift has increased volumes in strikes closer to the spot price, as traders aim to generate similar returns with fewer expiries,” said Azeez.

For the first time last week, traders felt the absence of Nifty Bank, which previously accounted for a significant share of F&O activity. This was reflected in the meagre average daily turnover of Rs 198 lakh crore on the NSE, the lowest for a Wednesday, or the Bank Nifty expiry day, in over at least two years.

“The drop in volumes could largely be due to Nifty Bank’s absence, which was a major liquidity and volatility driver in the F&O markets, along with all the other regulatory changes.” said Anand James, chief market strategist at Geojit Financial Services. “We will have to see where those traders will go since neither the monthly Bank Nifty contract nor weekly Nifty and Sensex contracts offer the same level of swings.”

In October, Sebi decided to implement the new norms in a phased manner, with only three changes – higher contract size, rationalisation of weekly expiries, and a 2% increase in extraordinary loss margin on all short options contracts on expiry day – starting from November 20. Despite all three rules being in implementation, traders will start feeling the pinch of higher contract sizes only from January, after all existing contracts expire.