Individual traders may flock to stock options amid change in F&O rules
The stock options segment may see a spurt in activity once the new F&O rules kick in, with 5-15 per cent of retail and wealthy traders expected to shift from index to stock options.
The contract size for index derivatives will be raised to ₹15-20 lakh from November 20 but will remain at ₹5-10 lakh for stock options. NSE, for instance, has revised the lot size for Nifty 50 from 25 to 75, meaning a single lot will now cost upwards of ₹18.5 lakh based on the current index value.
“The stock options segment could see a little more activity going forward as the contract size will remain unchanged,” said Jimeet Modi, Founder, SAMCO Securities.
The stock options segment on the National Stock Exchange saw an average daily premium turnover of ₹8,600 crore for FY25 compared with ₹61,400 crore for index options as of August 31 this year.
“If you are an options seller, it will take you 2.5-3 times more margin to trade Nifty options vis-a-vis stock options. We are already hearing chatter that traders are trying to build strategies for the segment,” said Modi.
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Riskier trade
Strategies used for index options can also be replicated for trading stock options. Trading the latter, however, can be a lot riskier and volatile. One reason for this is that less than a third of the 180-odd stocks are liquid and the impact cost can be as high as 3-5 per cent for intraday trading.
“Stock options prices are influenced by earnings season and corporate actions, which adds to the unpredictability and volatility. It is difficult to diversify across stocks, especially for those with limited capital of say ₹10-20 lakh. When things go wrong, traders could end up losing a lot of money,” said Tejas Khoday, CEO, FYERS.
In an ideal scenario, said Khoday, contract sizes for stock options should be further reduced so that retail traders can hedge the downside by buying puts.
Some believe that an increase in participation from retail and wealthy traders in stock options may not be enough to increase the liquidity in the segment unless proprietary traders and FPIs step up participation in a big way.
Losses in F&O
“Large algo traders, high frequency traders and foreign portfolio investors are playing for small gains on large volumes in the index options segment. They may not want to do the reverse and play for large gains on small volumes in the stock options segment as that can backfire if the bets go wrong,” said Deepak Jasani, Head – Retail Research, HDFC Securities.
Jasani feels that stock futures may be a better bet for retail and wealthy traders if they can afford the higher margins required in the segment. “The perception that options is a safe game to play needs to change. Losses per trade may be small but cumulatively these small losses can add up to a large sum,” he said.
In FY24, about 60 per cent of traders made net losses in futures, compared to 91.5 per cent in options, according to a recent SEBI study. The percentage share of F&O traders, who traded futures at least once during a year fell to 5.9 per cent in FY24 from 10.6 per cent in FY22.
“Trading a simpler instrument like futures, which typically depends only on the price of the underlying asset, gives you an advantage in a one-sided trending market. Options are complex as their movement depends on factors such as price of the underlying asset, time to expiry, market volatility, and the invisible hand of the market,” said a recent note by Capitalmind.