Nifty Midcap Select: A New Playing Field for Options Sellers!

Although the Select index is not new, the volume on its derivative contracts was subdued since its inception. However, as market participants’ interest is burgeoning in options trading, many traders have started to give this index a shot.

This past Wednesday, which was the weekly expiry day for this index (not anymore, as it has been shifted to Monday), its options contracts clocked a volume of 6.41 crore which is a record high so far. In contrast, the number of futures contracts traded on the same day was 1.5K. These volume figures are showing a stark difference in investors’ inclination towards options trading.

Image Description: A trend of total traded volume on Nifty Midcap Select index derivatives

Image Source: NSE

To give you a perspective of the kind of traction this index is garnering, almost a month ago, on 19 July 2023, the total traded volume of the same index was 2.2 crore. In other words, there is approximately a 190% jump in the total traded volume in less than a month.

So what’s triggering this sharp jump?

Firstly, it’s the never-ending interest in options writing, also known as short-selling of options. The biggest advantage of this strategy is theta (time decay) which lets traders make money even if the index does not move much till the expiry of the contract. More precisely, out of 3 probable directions (up, down & sideways), traders can make money in all three directions, depending upon their strategy.

Secondly, it is lower margins for hedged positions. If you buy 1 lot of MIDCPNIFTY, you will be paying an approx margin of INR 76,000 but if you hedge it with, say an ATM PE, your margin requirement will drastically fall to, guess what? Approx INR 17,000 only. This margin benefit allows small traders to participate in the derivatives segment which also leads to a volume jump.

Thirdly, there is no other instrument that has a weekly expiry on Wednesday, at least as of now and therefore traders get to utilize their idle cash in this instrument. Currently, there is a stiff competition going on among indices to capture one day of the week for their weekly settlement.

Shortly, the weekly expiry will take place on Wednesdays and the Nifty Midcap Select index expiry has already shifted to Monday now. The 21 August 2023 will be the first Monday weekly expiry for Nifty Midcap Select.

Read More: 5-Day Expiry Week: New Regime in Indian Stock Market!

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