Nifty will be the real test of the concept of weekly options
During the month of December, SEBI granted the NSE permission to launch weekly options on the Nifty 50. It may be recollected that the weekly options on the Bank Nifty was launched in 2016 and this product has seen very good traction since then. The question is what happens when the weekly options on the Nifty 50 are also launched. While the move should be positive on paper, the real test of the power of weekly options will only be visible when the Nifty 50 options are launched.
Merits of weekly options
Weekly options are not without merits. In the case of Bank Nifty, the weekly options have led to a sharp growth in the volumes on Bank Nifty derivatives. There are some distinct advantages that these weekly options have. Firstly, it opens up the doors for arbitrage between weekly and monthly options. That is quite popular in these Bank Nifty options and that is likely to have a positive impact on the Nifty 50 option volumes too. Secondly, traditionally retail investors have been wary of selling options because of the high costs involved and the higher implicit risk due to the longer tenure. The introduction of weekly options should entice retail investors also to buy and sell Nifty options more confidently as the risk is much lower due to the shorter tenure. That could again position the Nifty 50 options as the most popular options in the derivatives market.
A better hedge
Unlike the Bank Nifty which is still a sector specific index, the Nifty 50 is a broad based index and covers a much broader portfolio. This gives two distinct advantages to the trader in weekly options. Firstly, it is more predictable since technical levels could work much better in case of the Nifty 50. This will make it easier for traders to determine the strike price on which to write these options. Secondly, the weekly options are also a cheaper way to hedge a set of stocks or beta hedge a more diversified portfolio. Bank Nifty options may not be the best way to hedge the overall market risk. Also, weekly options make the task more granular. You can only hedge the Nifty 50 for the particular when you foresee greater volatility due to news and event flows. This helps reduce your risk and cost of hedging with weekly options.
A good starting point
The regulator has experimented with the idea of weekly options with Bank Nifty and now that template can be replicated for Nifty 50. For traders and even for hedgers, this is a more granular approach to hedging your portfolio risk with very specific time contours. Also it will encourage more liquidity on the sell side of options rather than just institutions and prop desks. To that extent, this can make the markets a lot deeper and broader!