Volumes likely to take a hit as new F&O rules come into play, say experts

With the introduction of dual weekly expiries -- one for Nifty and one for Sensex -- a significant shift in trading patterns is expected with Nifty, being more liquid, is expected to retain its dominance.

All eyes would be on the volumes this week as this would be the first week with the new F&O rules in play, which means, there would be no weekly expiries for most indices. While some market participants expect volumes to decline marginally, there are others who believe that the hit could be in the range of 10-30 percent as well.

Recent changes in the rules for the derivatives market have prompted traders, especially algo ones, to adopt a cautious approach as they wait for smoother market dynamics. Traditionally, traders capitalised on weekly expiries for theta decay – also called time decay and is a measure of the value of an options contract as it nears its expiry date -- by targeting specific indices such as Bankex on Mondays, Fin Nifty on Tuesdays, Bank Nifty on Wednesdays, Nifty on Thursdays, and Sensex on Fridays.

With the introduction of dual weekly expiries -- one for Nifty and one for Sensex -- a significant shift in trading patterns is expected with Nifty, being more liquid, is expected to retain its dominance.

The change is likely to lower volumes for two main reasons. First, algorithmic traders who relied on patterns from multiple indices, such as Bank Nifty and Fin Nifty, are now adjusting to the revised structure. Second, volatility, which was earlier absorbed by Bank Nifty’s weekly expiries, will now shift to the last week of the month, making it more pronounced in Nifty.

Nirav Karkera, Head of Research, Fisdom expects the week will be transitional in terms of volumes and volatility. With the new rules kicking in, we expect volumes to ebb this week and this could potentially ease headline volatility to a fair extent as well, he says. Karkera expects volumes to shrink by 15% to 20%.

Additionally, anticipated changes in lot sizes -- from 25 to 75 for Nifty and 15 to 30 for Bank Nifty -- have also contributed to the cautious sentiment among participants. Most proprietary traders, whether rule-based or swing traders, are expected to remain in a wait-and-watch mode.

Prashant Tapse, Senior VP, Research Analyst, Mehta Equities, said that the new F&O rules will have substantial impact on option volumes. The minimum contract value for index F&O contracts is now Rs 15 lakh, up from the previous range of Rs 5–10 lakh, which makes it more difficult for retail investors to enter the market. He expects a drop in volumes to the extent of 20-30%.

Meanwhile, other factors also suggest a subdued trading environment and can act as catalysts. The upcoming FOMC meeting, combined with the December holiday season in the US and the traditionally slow January, indicates a broader range-bound market with choppy sentiment. Changes in F&O guidelines may further contribute to a decline in volumes, adding to the overall conservative outlook.