Weekly Expiry for Nifty – A New Chapter in Equity Derivatives for India
Today’s post I will take you back to the controversial aspect in the Stock Market for the majority of Indians. We have already seen in the previous posts of mine on what are derivatives and how they are traded and also how they help the investors to cut down the losses.
Though that’s the main reason for
derivatives being introduced, the agenda has completely changed and we see more
traders than investors in today’s market. But let me tell you that the number
of traders that we see in our Indian Stock Market is much less when compared to
Stock markets like America, Europe, China and Japan. For your easy
understanding, India’s population contributes to almost 20% of world’s
population whereas the Indian Stock Market derivatives trading contribution is
at laughable 0.5% of 100%. That’s the fact which would hit us badly but that’s
Reasons for not trading are many, some are technical while some are due to fear. There is no need to fear or worry, derivatives if learnt properly is very easy and very profitable indeed. Let me tell you the story of derivatives in just 3 simple points:
1. Unlike stocks, where one person’s loss is another person’s gain, derivatives trading is something where everyone can gain or everyone can lose. In simple terms, if you want to buy something you need not have a seller and vice versa. So, in derivatives, if you feel that you can make profits, everyone can buy and everyone will gain money. Thus wealth is created in Options contracts of derivatives. Otherwise also in equities, if we see the loss made by one person is the gain for another person. But the derivates markets are different, here both the traders can make profits at the same time. It’s because of this derivatives market that the world was able to fund the internet and technological revolutions.
2. In Indian till last month, there were monthly expiry Futures and Options contracts. And as we are in the European options methodology, a trader has to wait for the end of the month to close transactions and get the money into the bank account. This limits him from trading very frequently and you would also have to wait till the last day to get your money. But now from this week, Nifty weekly contracts were introduced and the first expiry will happen on 14th Feb. Now the trader can get the profit he made in his account every week and that is a major advantage of weekly expiry. This will surely increase the volume of the contracts traded.
3. The Last point we need to look at is why the derivatives are so low in India? It’s just 0.5% of the total volume of derivatives across the World. Even in that, 90% of derivatives volumes come from equities that mean other derivatives take just 10%. Whereas if we look at the USA derivatives markets, in the OTC category 77% of the derivatives volumes come from Fixed Income derivatives, 9.3% comes from Currency and 8.3% from Credit, 3.5% from equities and only 1.3% come from Commodity derivatives. So if we look at our derivatives it’s a complete monopoly, with no other instruments able to pitch in and increase the derivatives contribution.
India has a long way to go. First, the volumes in equity derivatives have to increase, then other instruments like debt, currencies should be tried. Derivatives are simple and easy if you really want to learn to multiply your money, make a small effort of learning it because the future for Indian Stock Markets is Derivatives Market!