INSUBCONTINENT EXCLUSIVE:
By DK AggarwalFear of volatility has created a big shift towards the options segment of the derivatives markets across exchanges globally
Post Lehman meltdown followed by other crises, traders and investors have been showing more confidence in options, which allow them to
substantially mitigate the risks that financial markets have become so prone to.
Derivatives trading in India has expanded many folds amid
financial inclusion, awareness generation and robust regulation.
Weekly options in Nifty index is the latest milestone in this arena
The weekly index options were launched in February this year and have witnessed a meaningful rise in volumes
And it may be safely inferred that traders are getting inclined to such structuring of derivatives instruments
To be precise, weekly options allow better participation by traders in a particular binary event, where one is required pay low premium to
major event, traders can receive the premium by writing weekly option contracts
However, the receivable will be less compared with the monthly premium
At the same time, uncertainty or volatility of these contracts are low due to their short duration, which can help traders enjoy a premium
with low, adjustable risk-reward ratio.
Another important advantage of weekly options is the utilisation of hedging strategies.
In uncertain
times like the ones we are going through currently, an investor may get caught on the wrong foot in a particular Nifty stock because of a
sudden negative development
To mitigate such overnight or weekly risks, one can get into a risk-reversal strategy by buying weekly Puts to take care of unsystematic
risks.
Also, weekly options allow traders to structure their trades in a more enhanced way in options spread trading
For instance, when one is anticipating a moderate upside in a stock or the index, one can use a Call Spread strategy and buy weekly Call
options at low premium and sell monthly contracts to receive higher premium, leading to negligible outflow
If the stock or index remains in the chosen strike range, traders can make decent profit by utilising the weekly contracts.
As volumes are
ticking higher, we can extrapolate that the weekly index option market is going to make substantial contributions to the Indian derivative
markets in the days to come
Chairman and MD, SMC Investments and Advisors
