By Ruchit Purohit & Yoosef KP
The average daily turnover of the derivatives segment on the National Stock Exchange hit a record Rs 100.09 lakh crore in February. Trades in the segment are now valued about 40% of the of the total market capitalisation of the NSE. As of February 28, the combined market capitalisation of all listed companies on the NSE stood at Rs 250.54 lakh crore.
NSE, the largest derivatives exchange in terms of the number of contracts traded, enjoys 97% market share in the F&O segment, whereas it accounts for 92% in the cash segment. The average daily turnover has been on an upward trajectory ever since the pandemic broke out. The average traded value on the exchange rose to Rs 54.84 lakh crore in 2021 from Rs 19.33 lakh crore clocked in 2020.
According to Vinay Rajani, senior technical & derivative analyst at HDFC Securities, “The key reason behind the record F&O turnover is increased volatility in the market. The volatility of Nifty50 has reached its highest level since April 2020. Moreover, facilities like short selling and hedging portfolio in derivatives segment also increase during the uncertain time like this.”
Recently, market regulator Sebi had tweaked the option rules and removed the ‘Do Not Exercise’ (DNE) facility. The removal of DNE has made it mandatory for In The Money (ITM) option buyer to either square off his positions before expiry, or buy shares from the auction market and deliver the shares to the counter-party. Earlier, trader had the right, but not the obligation, to execute the contract.
The strong rally in the equity markets over the last 18 months has increased risk appetite of individual investors to generate short-term returns, out of which a large value was seen in the F&O trades. On the other hand, turnover in the cash segment has remained comparatively lower as the segment is only active during the bull run. Rajesh Palviya, head, technical & derivatives, Axis Securities, said, “Cash segment slowdown is majorly because of weakness in near term trend as both indices Nifty and Bank Nifty are trading below their 20, 50 and 100 day SMA, which indicates trend is weak. Generally, in cash segment healthy participation comes in bullish environment.”
Analysts believe that the emergence of algorithmic trading in the markets has led to high volumes and turnover in the segment, as it follows the automated and objective rules by avoiding human intervention, especially when the markets turn bearish. They further added that the volatility is likely to be higher in March as well amid the Fed rate hikes on the cards, continued geopolitical crisis, and election results of the state of Uttar Pradesh. Additionally, benchmark Index remains the best tool to hedge an individual’s portfolio or to deploy the Option strategy to participate during such uncertain times.
