The rise & rise of Options Trading Worldwide

[RahulDeshpande]

Recently I came across an article : What’s driving the growth of Options-Trading on Nasdaq’s blog by Phil Mackintosh, Chief Economist and Senior Vice President at Nasdaq who has done a detailed analysis on the Growth of Options Trading in the recent years.

US Markets:

A data point highlighted in the article is worth to be pondered upon:

• The options market in US trades around 40 million contracts. In 2010 it was 15 Million and it was less than 2 Million in 1999

Few of the reasons why there has been in a rise of Options Trading in US:

• Increased market volatility that we’ve seen, which has made options an attractive tool for hedging risks or taking advantage of market movements.
• Availability of lower trading costs and greater access to trading platforms, which has made options trading more accessible to retail investors
• The availability of new and innovative products, such as weekly options, which has attracted more traders to the market.
• Greater financial education and awareness among investors, which has led to increased interest in options trading.

Indian Markets:
Similarly, while researching on the increase in the Options Turnover we came across an article: Indian Exchanges – Rise Of Options Turnover by 2Point2 capital, where the reasons for the increase in the turnover matched with that of the US Markets.

As we can see, the NSE Options turnover have consistently increased with a major catapult seen during the Covid lockdown period.

NSE’s options turnover has increased 50x over the 2015-2022 period. Options turnover which was 3x that of the combined Cash and Futures volumes in 2015 has increased to 70x in 2022.

Similarly, it’s observed in the MCX Futures & options Turnover too. And right now, MCX has more 7 commodities options to Trade into.

One interesting note here is that: Unlike US, India levies STT ( Security Transactions TAX) on the value of securities traded on the equity (STT) and commodity (CTT) exchanges. This tax increases the transaction costs, making it more expensive for investors to execute trades. STT/CTT can make several investment strategies unviable due to the higher effective costs. Yet there it hasnt deterred a lot of traders.

Similarly, the business effects on the NSE & MCX has been massive. In the article it quotes that, “For NSE, options trading now accounts for ~85% of its transaction income. This number was less than 35% just five years back. This has been the biggest driver of the increase in NSE’s turnover (3.3x) and profitability (3.5x) in the last 3 years. It’s no surprise that NSE’s share price ( unlisted share price) has increased from 850 in June-2020 to as high as 3500 in December-2022.”

BSE has also announced a change in their Tick Size to capitalise on this increased demand. We would have to see how it pans out.

And as always, it is important for investors to do their due diligence and carefully consider the risks and benefits of any investment strategy. The rise of options trading presents both opportunities and challenges, and Investors/Traders should be prepared to navigate this complex market.

What do you think about the rise of options trading? Are you bullish or bearish on this trend? Let us know your thoughts on the increase in the Options Trading.

Quirky fact: In US there are 16 stock market exchanges.

Disclaimer: Trading and investing in the securities market carries risk. The Content is for entertainment and informational purposes only and you should not construe any such information as investment, financial, or other advice. Data and information is from publicly available sources. Please do your own due diligence or consult a trained financial professional before investing or trading. Don’t take this post as investment advice, it’s purely meant for educational and entertaining purposes only.

[amit]

How about India’s currency market growth in the recent years?

[t7support]

I realised few years ago that

1. Transaction charges are less with options compared to trading with futures. I used to trade with futures when I started trading.
2. It is possible to make good profits in absolute terms from small capital base with long option strategies - trend following, breakout momentum trading etc. All I need to pay is the small premium for the long option.
3. With positional strategies it is best to play with long options as opposed to futures as the max lose is limited to the premium payed. Hence am insulated against overnight gap risk.

Now I trade with options only in the equity segment. In the commodity segment though I want to play with options, liquidity is still abysmally low compared to futures. So I stick with futures there for quick entry exit with less slippage.

It seems just like me many others got switched to options. But am thinking large part of the option volume is from option selling strategies and may not be naked option buying like I do mostly. Inorder to get the hedged margin benefit a seller needs to hedge. So its already 2x option trades for a single directional trade. More the number of legs with more complex option strategies that many x option trades for a directional or non directional trade. @RahulDeshpande am not sure whether you can pull the data like that to know whether sellers contributed overwhelmingly to the volume spike in options ?

The rise of option trading platforms, algo platforms also I think would have contributed to the tilt towards options because they made execution of even complex strategies easy.

We can’t also ignore the effect of fin influencers who sold a dream to the retail that option selling is the way to get better than FD returns with FD like consistency.

[PravinJ]

Very. true @t7support.

On that note and for this topic, someone I know mentioned few months back - lots of amateur and first time trades are coming to Options Trading directly and jumping to Nifty / Bank Nifty… which possibly isn’t the best thing to do. Ideally learn trading in cash segment, or if in options - then Currency segment were margins are low and so is volatility. Practice and learn the art, before getting adventurous with Options Trading directly.

[Prabhakar]

@RahulDeshpande

It’s no surprise that NSE’s share price has increased from 850 in June-2020 to as high as 3500 in December-2022.”

NSE is not a publicly listed company.

Also, I don’t know why this man is obsessed with the white men.

Yesterday, there was an article from him praising Peter Lynch.

Quoting Peter Lynch’s CAGR from an era when the markets were not matured, tax and transaction costs were low and a thousand loopholes to avoid tax, is like comparing apple’s to orange in 2023.

[amit]

In the business of trading or investing, it is said that lesser decision making and lesser emotional decisions would sustain for longer years.

[RahulDeshpande]

Hi @Prabhakar,

A very warm welcome to the Dhan community

Thanks for highlighting, i have changed the quote, mentioning that it’s unlisted share price.

We are obsessed about creating value to our all community members. Do let us know which trader’s you look upto, and we surely try to create a profile of them. It will help our other community members.

Keep contributing to the Dhan community

[Rajv]

I feel option trading is good as long as the risk is well managed. It slowly eats the capital if the risk is not managed properly. Any individual should start with buying some shares, elevate by doing swing trades using charts, followed by intraday trading with small capital and finally should enter into options trading.

Options trading may not be suitable for working professionals because it will considerably affect the performance of the core office work. It will be extremely difficult to concentrate on your work while positions are open.

So, it is better to do strategies with 1:3 return ratio if the person is working professional with less monitoring. It is best to do swing trades with targets.

[Rangera]

Intraday trading ideas

[aritra]

Hello @RahulDeshpande,

Firstly, thanks for posting the article. It’s enthusiastic & notable. My thoughts on the same as I understand it is as follows-

Man’s speculative nature has been multifolded in recent years especially in 3rd world countries like India & China besides in Europe. This is reflected in increasing open contracts in Options market.
(Note: recently I have been talking to Mr.M.J.Jenkins. He also pretty much confirmed the same. Besides, he has his own concerns which I share too. In case, if you’re yet to aware about his body of work here is his YouTube channel: https://www.youtube.com/@michaeljenkins9435)

1. Increase in participation of options trading doesn’t necessarily reflect traders’ skills to do so. Mr.Deshpande, you’re in a better position to judge so since you have a database for the same. And I am blindly guessing here that result is not good.

Solution: So, make traders’ do what they do in Options market & keep them doing it for a foreseeable future, they would need training. And they would need it for free. As Mr. Vijay Kedia in an interview clearly pointed out that retail participants should pass a test on derivatives trading conducted by SEBI before they are allowed to trade in derivatives & which is not going to be implemented any time soon & man will keep speculating until they dry out their account, free & constructive training is the only way to go. Free because not a lot of people would be interested in paid courses since one course would get them so far. Otherwise, one set of traders would come then they dry out their account & get out of the market then another set of traders would come. This is not sustainable.

2. In U.S & Europe, there is a tradable instrument called Bear ETF. It goes up when the underlying goes down & it doesn’t have an expiry. As far as I know, world’s most tradable instrument based on volume is ETF & Bear ETF then Currency then Bond then Options then Futures then Mutual Funds then Cash segment. Though I checked the same a year or two ago but I think it still holds the same & also if you have to do an instant search on the same, it would be tricky for you to come-up with the same conclusion.

Problem that aforementioned information poses for Options market is that if some day India is to introduce Bear ETF which I believe Union Govt will, it will have an impact on Options turnover given bear ETF gives more flexibility in terms of expiry & time decay. Because both are non-existent in bear ETF. Remember, Europeans are speculating despite they have access to bear ETF & we are speculating the specific way because we don’t have access to bear ETF. Output is same but mindset is different.

So, if that happens, one education & second, better product offering would keep traders hooked.

3. It’s my understanding especially applicable for India that people are more interested in trading options because there is circuit limit for every options scrip, yet IT DOESN’T WORK. How many times we have seen a two-rupee worth of Nifty options contract going up upto rupee 21 to 35 in intraday. If circuit limit would have been implemented properly would that happen & then how would traders react, think about it.

I am yet to determine our collective destiny in long term when it comes to options trading but I am sure the above discussion would be determining factors among others. At the end of the day, time will tell it’s story, till then let’s keep thriving.

Sincerely,
Aritra Sinha.

[RahulDeshpande]

We are onto something here Will keep you posted.