Derivatives volumes have seen the fastest growth in 14 months as improved market sentiment, lower perceived risk along with a so-far-good results season have led investors to trade more in the futures and options segment.
The aggregate monthly derivatives turnover on the National Stock Exchange rose 21.5% year on year in October, the most since August 2011.
The average daily turnover in stock options has seen a consistent rise over last four months and stood at Rs9,643 crore in October as against Rs3,483 crore seen same time last year.
Similarly, turnover in stock futures has improved 25%.
Rise in stock-specific calls and better cost of carry leading to arbitrage trades may have helped the cause, say experts.
“The rise in cash turnover along with a pick-up in F&O (futures and options) volumes suggest better arbitrage activities. Usually, in an uptrending market, there is inherent demand on buying stocks in cash and if the cost of carry is high, arbitrageurs engage in selling futures,” said Karun Mutha, senior vice-president & head equity & derivatives advisory at HSBC Invest Securities.
The average daily combined cash turnover on exchanges has risen to Rs14,000 crore in the last two months as compared to around Rs11,700 crore witnessed in the preceding four months.
Rikesh Parikh, vice-president, markets strategy and equities, Motilal Oswal Securities, said the quarterly results, too, have helped perk up volumes.
“There has been a lot of stock-specific option activity ahead of results, which one does not see in normal trading. The volumes that one is seeing on that front are higher than what is usually seen during results season,” he said.
There has been a substantial decrease in implied volatility, which has led to improvement in open interest in the derivatives segment and thereby higher volumes, say experts.
“The average open interest has been rising month on month since June this year, and has in fact touched a 13-month high,” Sheela Rathi, Ridham Desai, Amruta Pabalkar and Utkarsh Khandelwal, analysts at Morgan Stanley, wrote in their India Strategy report dated November 1.
Mutha said open interest, too, has been higher as the implied volatility has been lower and this has led to higher activity in index options with buyers getting the options cheaper.
In fact, implied volatility, an indicator of perceived market risk, touched multi-year lows last month, with India VIX dropping to 13.04% on October 22.
Experts feel the market still has some steam left.
“Though the Nifty breached 5600 levels, we did not see too much panic then and there has not been much unwinding of 5600 puts. So markets may not see much downside till 5600 is broken convincingly,” said Mutha.