Nifty got its spring back, Investors get their Options right

Nifty's On A 5K Trip Again, And Looking Good For A Long Haul. But Caution's The Word On The Street IN SEPTEMBER 2007, around the time when the Nifty touched 5000 for the first time, activity in equity futures segment was close to its peak, thanks to frenzied participation by retail participants. Two years hence, the index has revisited 5000, after almost 15 months, but this time the action in equity futures is rather moderate compared to the later half of 2007.      This is because many retail participants, who were active in 2007, have given the recent rally a miss and trading interest has shifted to options, mainly Nifty. The average daily open interest, which is the total number of contracts that are yet to be closed, in stock and index options since early March, when the rally started, stood at 29-crore units. In the past six months of 2007, the total open interest in options was 21 crore.      The aggregate daily open interest in index and      stock futures in the second half of 2007 was 173-crore units. Since March this year, the open interest in the futures segment is roughly 116 crore. But, for the improved activity in stock futures of late, led by a rally in mid- and small-cap stocks, the open interest in futures would have been much lower.      "Though markets have more than doubled in the past six months, volatility has always been on the higher side. Traders recognised that options were a better product to deal with in such a situation," said Vijay Kanchan, V-P, derivatives at Dolat Capital.      Also, the transaction costs, including taxes and brokerages, in futures are more than double the expenses in options, Mr Kanchan said. A larger portion of the retail investors, who contribute a sizeable chunk to the futures and options volumes, have shied away from using equity derivatives, mainly futures, to bet on recent upsides. This is because many of them are yet to recover from the losses and agony they had incurred in early 2008, when their bets turned awry after stock markets went into a tailspin. In futures, the prospect of upsides are unlimited, while the risk of losses is also equal. In comparison, a buyer of options faces a limited risk of losses, while unlimited gains.      "It is a healthy sign for the market that investors are slowly moving the options as seen in most developed markets," said a derivatives head of a foreign brokerage. "Lower futures activity reduces systemic risks in times of a downsides because of the possibility of unlimited losses," he added.