Change in contract structure, leverage combined with the ease of onboarding and interface of the new generation trading apps has triggered gamification of the derivatives market, according to a report by Axis Mutual Fund.

Equity derivatives account for 99.6 per cent of market volumes, totalling over $4.3 trillion per day. Derivatives volumes are now 400 times that of cash equity and 900 times of delivery-based trading volumes.

Alignment of expiries in key indices to different days of the week now facilitates zero-day expiries, and will further boost volumes.

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As a result, the number of active derivatives traders has increased eightfold from less than half a million in 2019 to 4 million. Several are from tier-II and III cities. Index options are the preferred choice, constituting 99 per cent of derivative volumes and within this, weekly options account for 95 per cent of the trades.

Speculative bets

The effective leverage on an index option during expiry day is 500x, which is luring the retail traders, according to the report. A ₹2,000 option, for example, allows ₹10 lakh exposure and these are largely speculative bets a retailer holds an option on average for just 30 minutes.

“A key reason for the attractiveness of the product is the embedded leverage, where only a fraction of the notional value is needed to transact that ends up magnifying the potential gains (as well as losses) for the participant,” said the report.

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The growth of derivatives market is not unique to India. In the US, derivatives account for 70 per cent of traded volumes. In most markets, derivatives volumes now account for 5-15x their cash market volumes.

Of the over 5,000 companies listed in India, derivatives contracts are available for 193 stocks and indices. For these, there are about 46,000 individual contracts available at any point spanning products (futures, options), tenor, and strike prices. Index options account for 98 per cent of total derivative volumes.

Investors’ profile

The average age of an equity retail investor is 35 years, whereas those with digital discount brokers is 29 years, similar to 31 years for online gaming companies. Notably, half of the new customer additions are below 25. “The introduction of shorter duration in options has effectively “sachet-ised” trading, reducing the capital needed to take on similar risks,” the report noted.

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Weekly options are cheaper compared to monthly contracts, and buyers gain exposure to the full notional value by paying only 0.5-5 per cent for the same. For example, Nifty’s at-the-money weekly contract is available at 40 per cent of the cost of a monthly contract while offering the same notional value. This effectively increases leverage to 126x, from the 56x leverage offered by monthly contracts. In the case of zero-day-to-expiry options, leverage increases further to an astonishing 420x.