Index Futures Hit a 6-yr Low as Market Trapped in a Range

Daily avg turnover of NSE index futures is . 8,193 cr so far in August, the lowest since Nov 2006

Activity in index futures has hit a near six-year low in August as fewer derivatives traders are using Nifty futures to bet on the benchmark these days in a market trapped in a narrow range. The range-bound trading in indices has resulted in heightened activity in specific stocks, sparking action in stock options. Daily average turnover of index futures on NSE was . 8,193 crore so far in August, the lowest since November 2006 when the average was . 7,649 crore. Majority of the activity in index futures is from Nifty contracts. 
"Lack of triggers in the market has led indices like Nifty to be range-bound. Low volumes indicate that participants are tired of trading in such a range. After the January-February rally the index has been flat with a very narrow consolidation range," said Sahaj Agrawal, head – derivatives at Kotak Securities. 
Futures and options volumes are dwindling and have often fallen to historic lows on lean days such as Monday, when Nifty futures registered one of the lowest trading volumes this year, with just 1.6 lakh contracts changing hands. Volumes in Nifty futures had first declined in March and April 2012 after the government proposed to tax short-term gains on overseas investors through the socalled General Anti-Avoidance Rules. Then, volumes had shifted to the same contract in Singapore Exchange. 
However, even as some of that volume returned to India after the government deferred GAAR, continued policy paralysis at the Centre and the lack of triggers in the near-term have meant the Nifty has not moved sharply. 
The range-bound markets have had an unlikely, if not direct, impact on stock option volumes. Stock options trading on NSE had an average daily turnover of . 6,731 crore in August, which is the highest recorded turnover in the history of stock options. 
While the benchmark 50-share Nifty is stuck moving in a tight band, many underlying shares have been moving sharply, giving opportunities for derivatives traders. 
"Though the Nifty index has not moved sharply, we are seeing a lot of action in many non-banking index heavyweights recently — from Reliance Industries to Infosys and Larsen & Toubro," said Amit Gupta, head – derivatives at ICICIdirect. Analysts said spurt in liquidity in options such as Infosys call options at 2300 strike price and State Bank of India put options are some examples, where activity was seen after their quarterly earnings announcements. 
Several retail traders are preferring stock options over futures nowadays as they find it lucrative to write, or sell stock options. Portfolio managers and persons holding large amount of shares are the buyers. Though writing options fetches traders an upfront amount as premium, the trade is considered risky because in theory, the prospect of losses are unlimited. In the past, volumes in stock options have dried up at the slightest instance of risk, leaving many retail traders with illiquid contracts and sizeable losses. 
"A large part of the stock options volume can be attributed to option writing by retail investors especially high net worth individuals (HNIs). They are tired of going long-short on small movements," Kotak's Agrawal said. "But even this increase in stock options volumes has only increased liquidity largely in the already-liquid options. The number of liquid and tradeable stock options rose from 20 to maybe 25, but otherwise there is no significant jump in broader stock options trading," he said. 
,nihar.gokhale@timesgroup.com