Retail traders shift from Nifty to stocks

The risk appetite of retail investors is rising and they are ready to bet more on mid-cap and small-cap stocks, according to data from the derivatives segment.

In the recent past, quite a few stocks in the futures and options (F&O) segment have hit their market-wide position limits. Experts say this is an indication of investors moving away from index derivatives to individual stocks.

According to some recent announcements on the National Stock Exchange (NSE), the stocks of IFCI, Aban Offshore, Ispat Industries, ICSA, Suzlon Energy, Kingfisher Airlines, Essar Oil and Everest Kanto Cylinders have seen their market-wide positions cross the upper limit of 95 per cent. The norms say once the market-wide position crosses the threshold, clients can trade in the derivatives contract only by offsetting their existing positions. Or, they can roll these over. In other words, clients cannot build fresh positions.

Experts tracking the derivatives segment attribute the trend to increased activity in the space outside the index constituents. With volatility taking a dip in the recent past, traders have no incentive to bet on index futures and options, say experts.

“Due to low volatility in the Nifty, a lot of trades in the derivatives space are moving to small-cap and mid-cap stocks,” said Alex Mathews, head, research, Geojit BNP Paribas. “India VIX (volatility index) is trading at an all-time low and the daily movement in the Nifty is not substantial enough for traders to make money. This tight range has made traders bet on individual stocks rather than on the index.”

India VIX is currently trading at a low of around 17. In May, it was around “concerning levels” of 35. The index is a measure of the market’s expectation of movement – upside or downside – over the near term. It plays an important role in the derivatives segment, since it is an important component in pricing of options. Low volatility implies low premium, which makes the game less lucrative for traders.

A section of analysts view this trend as a “normal occurrence” at the end of the expiry cycle of a derivatives contract. “There are four-five stocks that typically hit their market-wide position limits as the expiry day nears. These are stocks with a low free-float,” said Siddarth Bhamre, head, derivatives, Angel Broking.

Market players say the trend may be reversed if there is a rise in volatility or the daily band within which the Nifty trades. “If the Nifty becomes more volatile and the VIX also moves higher, one could see substantial action in index derivatives again. Traders will then take a break from individual stocks,” said a derivatives analyst with a domestic brokerage.