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Options outdo futures for first time in 8 years
Once seen as a product meant only for the more refined investors, options
are becoming more popular than futures, which are more of mass market
products. Data reveal that in August, options trading outpaced futures for
the first time ever since derivatives were introduced in India eight years
ago.

Market participants attribute this trend to the growing number of players,
including institutions, that are finding options much more profitable,
especially in the current range-bound market. Besides, the tax effectiveness
of options over futures after a change in rules this year has made it more
appealing to day traders and professional jobbers.

Options are derivative contracts that offer a buyer the right, but not the
obligation, to buy (call) or sell (put) a security at an agreed price
(strike price) during a certain period of time or on a specific date
(exercise date). When an investor buys an option, the profits that he can
make are infinite, but more importantly the losses he may have to incur are
limited. In futures both the profits, and losses, can be infinite.

"More and more investors are using options to ride the volatility in the
market, which is leading to better volumes in the segment," says Sailav
Kaji, head of derivatives at PINC, a domestic broking house. "The increased
participation is leading to still better liquidity and more efficient
transactions," he says.

According to data compiled by ET, options registered a total volume of Rs
3.12 lakh crore in August, which is higher than that of futures at Rs 3.01
lakh crore. Even the average daily turnover of options (Rs 15,605.09 crore)
has moved ahead of futures (Rs 15,022.44 crore) for the first time ever in
August.

Mr Kaji also points out that the recent introduction of long-dated options
has lead to increased interest in the options segment, although volumes
there are still to pick up. Options received a major boost when finance
minister P Chidambaram, in Union Budget 2008-09, amended the way securities
transaction tax (STT) was to be levied on it.

According to the new guidelines, if the option is not exercised, the seller
has to pay STT on the premium. If the option is exercised, buyer has to pay
STT on settlement price. The move led to many day traders and jobbers
switching to options that also allows them to leverage more as compared to
futures.

"Leverage and tax treatment are the two most important reasons for the
increasing popularity of options," says Edelweiss Securities assistant vice
president Vivek Jain. "Most of the institutional and retail brokerages have
started advocating options over futures in the current market scenario," he
added.

Industry participants said brokers, sensing the possible opportunities, have
also lowered the brokerage on options trading. "Brokerages charge anything
between 7 and 8 basis points to clients that want to trade in futures," said
a broker who did not wish to be named. "The same broker would charge 2-3
basis points for options," he added.

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"Day traders are left with no options but to trade in options since trading
in any other category of products attracts too much STT for a transaction to
be profitable," says Rajesh Baheti, MD of Crosseas Capital Services, a large
Mumbai-based brokerage that specialises in arbitrage trading.

He only buttresses his claim when he says that activity in the index futures
is only from the hedgers while those in the stock futures has fallen to
almost a quarter of the levels in January this year.

More than 50% of the volumes in the stock market are made by brokerages like
Mr Baheti's. These arbitrage chasers do not take any bets on the direction
of a stock, but only seek to lock in the differences between the price of a
stock and the futures based on it.

But, Mr Baheti says that nearly all of the volumes are restricted to index
options, since single stock options still do not have enough liquidity for
transactions to be profitable.

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