Can Nifty 50 weekly options emulate success of Bank Nifty?

We are in the instant era. Fast food scores over five course menus. T-20 scores over traditional Test cricket matches. With patience in short supply, the stock exchanges are not far behind. The NSE will soon launch weekly options on Nifty 50 Index.

Trading in Index options have seen a huge surge in recent years. It now accounts for 82 per cent of the total trading volume on the NSE. In 2009-10, it was just 50 per cent. In 2016, the NSE had launched weekly options in the equity derivatives segment on the Nifty Bank Index. Recently, it also launched weekly options in the currency derivatives segment on the USD-INR currency pair.

As both these products have seen widespread acceptance among market participants, especially Bank Nifty options, the exchange is trying to add to its market share by launching this new product.

Like the Bank Nifty options, the Nifty 50 weekly options will also have seven consecutive weekly expiries (excluding the week where monthly contract expires). On expiry of a weekly contract, the exchange will introduce the next weekly contract on a rolling basis. The current three monthly options contracts, three quarterly and eight semi-annual option contracts will also continue to be available.

Weekly options: Myths

The new contracts will expire on Thursday of every week. In case Thursday is a trading holiday, the previous trading day shall be the expiry/last trading day. The strike interval for the weekly options will remain the same as monthly contracts.

Most traders believe that the premium of weekly options cost far less than monthly options and will be at a more affordable level. However, the options will be less pricey vis-à-vis monthly options mainly as the time expiry period is so short — just five trading days. Simply put, you are not paying the premium for time value. But traders have a few days only for the stock or index to turn in-the-money. If the duration is long, the chance of the option turning in-the-money is higher.

Another attraction for trading in weekly options is that the premium will adjust very quickly to evolving developments. The rate of change in option premium for longer duration options with respect to the underlying price is expected to be slow as the option moves from an out-of-the-money position to in-the-money position. This might have worked in Bank Nifty options in the last few years because of a lot of news flow with just 12 stocks constituting the Bank Nifty index. Nifty 50 index options may not swing as wildly as news flow across these sectors may be sparse. Most of the times, the Nifty 50 moves in a predictable narrow range.

Another belief is that weekly options on Nifty 50 can provide an additional hedging tool to manage the portfolio risk more effectively. But this strategy works only for big investors or institutions that have strong and wide portfolio. For small investors, whose portfolios are skewed towards small- and mid-cap stocks, it may not help much.

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