Retail and wealthy individuals are gravitating towards writing options contracts — the more riskier side of the options market which was once the preserve of large institutions or expert traders.

The shift to options writing comes amid regulatory concerns on increasing retail participation in the derivatives segment. F&O trading results in losses for 90 per cent of individual traders, a SEBI study estimates.

Unlimited risk

Options trading gained momentum in the aftermath of the pandemic. Until now, most individuals focussed on options buying given lower risks as losses are limited to the premium paid, which could be a few hundred or thousand rupees. Options writers face unlimited risk and need to pay margins amounting to ₹1-2 lakh per trade.

“Those that have gained experience in options buying are now taking to options writing, which requires better skills and significantly higher margins,” said Devarsh Vakil, Deputy Head-Retail Research, HDFC Securities.

The advent of daily and weekly expiry has increased the probability of making money for options writers through various strategies.

“There has been a 20-30 per cent uptick in the number of individuals turning to options writing in the past six months or so. With daily and weekly expiry coming into the picture, traders don’t have to wait an entire month for premium decay and can see a significant meltdown (on the premium) within a day or two,” said Soni Patnaik, AVP - Derivative Research, JM Financial Services.

Market volatility has reduced considerably over the past three years, which is why options writers have not had many episodes where they have lost significant money.

“We haven’t seen large corrections of 10-15 per cent during this period unlike, say, 2003-07 or 2012-16. The low intra-month volatility has significantly increased the chances for options writers to make money,” said Vakil.

While the risk for options buyers is limited to the premium paid, such buyers have been facing the problem of faster premium decay, giving less time to realise a profit from a trade. Options writers, on the other hand, have benefited from theta decay, the amount by which an option’s value declines daily, said Chandan Taparia, derivatives analyst at Motilal Oswal Financial Services.

During the last expiry day, for instance, a lot of retailers tried to capture a small premium of ₹10-15 by selling naked put options and call options. If the market does not move either side and stays within the options strike price, they can gain the entire premium that they have written. However, if the expiry volatility breaches either of the strike prices written, the risk can increase significantly.

“It is imperative to hedge any naked options writing positions and convert it into options strategies such as spreads, which are becoming increasingly popular among participants nowadays,” said Patnaik.

Different strategies

Options writing strategies vary. An investor with an underlying stock could use covered calls to increase his or her income on the holding. Others could use put selling to get into a new stock which they don’t own and there could be traders who want to use theta decay to benefit out of options writing.

As more individuals take to options writing, they may find themselves on one side of the trade, raising risks exponentially. “A major surprise or large market movement could result in options writers losing their shirts,” said Vakil.

The equity options turnover on the NSE grew 28 per cent year-on-year to ₹1.51-lakh crore in FY24. The index options premium turnover for this fiscal stood at ₹138-lakh crore, a record high.