InvestorQ : Is weekly expiry of Bank Nifty options a good opportunity for traders?
Moii Chavate made post

Is weekly expiry of Bank Nifty options a good opportunity for traders?

Sam Eswaran answered.
2 years ago

The idea of weekly Nifty Options is nothing new. The idea has been experimented with in the past, although without much success. The big change came about when NSE got the approval from SEBI to introduce weekly options on the Bank Nifty and it finally went live effective May 2016. Over the last year, there has been some interest in weekly options building up, although the traditional monthly options continue to be the big story in Indian derivative markets. However, one year may be too short a time to judge the success or otherwise of a product as complex as weekly options. But it will be instructive to understand the unique benefits that weekly options offer for traders and hedgers.

While traditional monthly options expire on the last Thursday of the month, weekly options expire every Thursday. From the perspective of traders and hedgers, following are some of the key benefits that weekly options will proffer…

· Today the minimum time period of hedging or trading that you can do is a 1-month option. What if you want to a trade shorter time frame? That facility is provided by weekly options where you can take positions for 1-5 days. This is a good measure for very short term traders in the market, since the premium cost for traders is also much lower.

· Trading in the market is all about responding to economic data flows with speed. There are key data points each week like CPI data, WPI data, IIP data and trade data, all of which can have implications for banking stocks. Weekly options enable you to time the expiry around the actual event or the data announcement. This enables you to play the euphoria / disappointment surround the even more effectively and at a lower cost.

· Weekly options offer you more trading cycles and thus give you an opportunity to diversify your risk. Any month, after all, is a series of discrete time intervals. Weekly options help you to capture each of these discrete time intervals and play them separately. This largely reduces your risk as a trader.

· A very important role that weekly options will provide is arbitrage opportunities across time frames. For examples, when events are concentrated week, you can create long/short positions by buying options in one week and selling the same options in another creating a spread. Also when you find mispricing, it is possible for you to create an arbitrage opportunity between the monthly option and the aggregate value of put options.

· Weekly options can also look at these weekly options as a means of earning short term returns. Today option writers have to write options in the beginning of the month and then typically wait till the end of the month to realize their return when the options expire worthless. Weekly options, on the other hand, allow these option sellers to monetize their positions faster and also churn their monies at a quicker pace.

· Normally, option writing is more common among well-informed traders. Small and retail investors keep away from options writing due to the higher margins it entails plus the higher time risk in writing monthly options. Weekly options largely obviate that risk. Weekly options have lower option premiums and that also lowers the return but also lowers the time risk. This can encourage many retail investors to participate in selling options.

· Weekly options make the market more efficient in terms of liquidity and price discovery. When you have short term options trading, the weekly time frame ensures that such options trade at finer bid-ask spreads. One of the signs of an efficient market is narrow bid-ask spreads. When the bid-ask spreads are narrower, markets actually become deeper and it is possible to execute trades with limited impact cost.

That brings us back to the core question; why have weekly options not taken off in a big way. Firstly, we need to give this product more time to catch the fancy of investors. Secondly, for option buyers, it offers a lower cost option to participate in the F&O market and take positions in the Bank Nifty at lower cost. But at the end of the day, the success of any options market lies in the availability of enough traders to sell options. For option sellers, even globally, shorter options have not been attractive enough considering the lower premium income. That is likely to be a roadblock for the Weekly Options market.