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Trading in stock futures has been gaining currency this year as buoyant markets give traders the confidence to place leveraged bets on companies.
The share of stock futures in derivatives has increased from 15 per cent at the start of the year to 20 per cent this month.
Hopes that the economic revival will benefit some sectors more than others have led to interest in stock-specific derivative trading, say analysts.
“In a rising market, traders try to take stock-specific views because they cannot play on the index if they want more beta. If people are confident about the impact of the new policy framework on a few sectors, they could divert money from index to stock futures,” says Siddharth Bhamre, head of derivatives at Angel Broking.
In the run-up to the elections, infrastructure, capital goods, power, metals and realty stocks were in high demand. Investors stocked up on them both in the cash and the futures segments, analysts say.
“Generally, index futures are bought for hedging in the cash or the futures market. But in a market trending upward, the need for hedging is low, which is why we are seeing higher participation in stock futures,” says Hemant Nahata, senior research analyst with IIFL.
Experts believe the proportion of stock futures in derivatives may not rise. However, investor interest is expected to shift from large caps to smaller stocks.
“The build-up in volumes started around the elections and particularly after the results. That is when we started seeing fresh money from retail and high net worth investors,” says Sahaj Agrawal, deputy vice-president (derivatives research) at Kotak Securities.
Individual investors’ open interest in stock futures has doubled to 1 million shares since January while foreign institutional investors’ open interest has risen from 1 million shares to 1.5 million shares in the first six months of the year, according to industry estimates.
Experts say participation in stock futures has come from both retail investors and high net worth individuals. Institutions, domestic and foreign, have also increased their exposure to stock futures.
Many experts believe most of this has been re-allocated from index options, which have fallen from about 69 per cent in January to about 65 per cent in July.
“Funds in the markets have not increased, which indicates that money is just moving from one segment to another. In this case, from index options to stock futures,” says Bhamre.
The proportions of index futures and stock options have remained consistent at around nine and eight per cent, respectively between January and July this year.
