Increase in contract size hits derivatives volumes

Experts reckon at least 30% of retail volumes could get hit because of the new contract size

Increase in the minimum contract size for trading in equity derivatives from Rs 2 lakh to Rs 5 lakh has adversely impacted derivatives volumes on the bourses. According to exchanges data, monthly average daily volumes in the F&O segment has dipped about 23 per cent in November over the previous month. Monthly average daily volumes have stayed over the Rs 3-lakh-crore mark in six out of 10 months this year.

According to experts, 20-30 per cent of the F&O turnover comes from retail participants. At least 30 per cent of retail volumes could get hit because of the new contract size, they said.

Volumes dipped substantially in October in the run-up to the increase in contract size. The revision in contract size was made effective from October 30. Trading in near-month derivatives contracts makes up for about 90 per cent of the total turnover in the derivatives segment.

Typically, higher the volatility, higher the derivatives volumes, said experts. "The volumes in November clearly dipped because of the higher lot size, and not because of lack of volatility," said Siddarth Bhamre, head - derivatives, Angel Broking. Added Nithin Kamath, chief executive officer , Zerodha: "The first week of a new series typically sees lower volumes. But the concern is that despite the volatility seen in the last two sessions, derivatives volumes have not picked up."

The increase in contract size will jack up costs which, in turn, could impact liquidity. "As liquidity reduces, both impact cost and volatility will rise," said Bhamre.

Experts reckon retail investors could either move out of F&O altogether or migrate from stock futures to the options segment as the latter is less costlier. For example, instead of putting up Rs 2 lakh as margin for futures to buy, say, a stock future at Rs 100 and lot size of 10,000, investors might decide to buy an out-of-the-money call option at a strike price of 105 trading at Rs 2 since they will have to pay only Rs 20,000 (10,000 x Rs 2). "While the risk in buying options is limited to the premium paid, the chances of losing money are much higher than in the futures segment, where the risk is unlimited," said Kamath.

According to Bhamre, retail investors could be tempted to buy deep out of money options, as these are available cheaper. "These are available cheap because the probability of making money in them is less. But this will eventually lead to more losses," said Bhamre.