In the first week after Nifty weekly options were introduced in February, the immediate week options saw volumes to the tune of nearly 3 times the volumes on monthly options. This has given an impetus to weekly options tradingon the Nifty. We have observed on the Nifty Bank that the introduction of weekly options actually took the total volumes on the Bank Nifty options to above the volumes on Nifty options. How exactly are traders going to be benefited?
How trading weekly Nifty options can be an advantage?
The NSE recently launched weekly options on the Nifty 50 Index, which will provide market participants an additional hedging tool to manage portfolio risk more effectively. In fact, the Nifty 50 Index options are already available for three monthly option contracts, three quarterly and eight semi-annual option contracts. Nifty 50 Index options are based on the flagship Nifty 50 index and is traded actively by domestic as well as international participants. The NSE in the meanwhile, has also secured permission to commence trading in weekly options on the Nifty IT index. For the Nifty weekly options, the key benefits will be as under:
Nifty weekly options will offer a better method of playing the risk or the volatility in the market which is restricted to a week. Take the case of the election counting on 23rd May. For that week, weekly options could be a better way of playing the volatility and the opportunity in a more effective manner since the pricing of the monthly options can be quite inefficient in such cases.
In the case of options, the pricing of the options is largely based on the tenure to maturity. To that extent, the weekly options have a shorter risk profile compared to the monthly options. Since the risk profile is shorter, the pricing of such options will also be low. Hence retail participation will improve as it helps to buy options at a lower price and reduces the fixed cost payment for buying options.
Retail investors normally tend to stay away from selling Nifty options as monthly tenure tends to become a tad too risky for them. This problem can be addressed via weekly options. Since the weekly tenure has a shorter time to expiry, the theta or the loss of value is much quicker. Thus retail investors looking to sell options can realize quicker profits with shorter risk profiles.
For traders and professional proprietary desks, the weekly options offers the opportunity to play multiple strategies for each week depending on the result flows and the news flows during the various week. For example, key events like budget, monetary policy, US data flows, corporate results etc can be played more granularly through weekly options and with greater precision.
Weekly options on the Nifty offer the benefit of arbitrage between different tenures. Since different option tenures can show different levels of volatility, traders can pick and choose which tenures and maturities to buy and sell and trade accordingly. This can create a non-directional strategy on the Nifty without taking on any directional risk and just play on the mispricing of the Nifty options.
In case of covered calls on the Nifty against a portfolio of stocks using beta hedging, the Nifty weekly options can be a better choice. The trader is able to churn the profits faster as transactions can be unwound within a shorter time period and this improves the ROI for the trader, enhancing their returns in the long run.
In a volatile market, the monthly options can become too expensive and also too risky. An exposure to weekly options works better in such cases as the volatility gets factored in over shorter time frames reducing the risk of the trader overall.