In the last ten years, the Indian derivatives market has changed in amazing ways. One of the most important new things is the introduction and quick growth of weekly options contracts. Weekly options were once thought of as an experimental product, but they are now the most actively traded type of stock on the National Stock Exchange (NSE), especially in indices like Nifty 50, Bank Nifty, and FinNifty.
This blog talks about why weekly options are so popular, what they offer traders, and what risks they come with.
The growth of weekly options in India
Bank Nifty contracts were the first weekly options to be offered in 2016. The NSE decided to add weekly expiries to Nifty 50, FinNifty, and some stocks because they were doing so well. Every Thursday, or the last trading day before a holiday, weekly options end. Monthly contracts, on the other hand, end on the last Thursday of each month.
This structure gave traders more chances to trade, which led to a huge increase in trading volumes. Weekly options make up most of India's derivatives trading volume today.
Why Weekly Options Became Popular
Less expensive premiums
Weekly options are less expensive than monthly contracts because they expire sooner. This draws in retail traders who might not have the money for expensive monthly options.
Many chances
Traders can take advantage of more opportunities when there are four or five expiries in a month instead of just one.
Trading Based on Events
Weekly contracts let traders get ready for things like RBI policies, the Union Budget, corporate earnings, and events happening around the world.
A lot of liquidity
Nifty and Bank every week Nifty contracts are very liquid, which means that the bid-ask spreads are tight and prices are found quickly.
Retail Participation
Thousands of new retail traders have joined the derivatives market because it is cheaper and more frequent.
Weekly Options: What You Can Do
Scalping and Trading During the Day
Scalpers love weekly options because they can make money by taking advantage of small price changes during the day, especially on Thursdays when they expire and prices are very volatile.
Making Money by Selling: Option writers can make money from quick time decay (theta) in weekly contracts. If you manage your risk well, selling out-of-the-money (OTM) options can give you a steady stream of premium income.
Plans for Events
Traders can use weekly options to bet on events without having to sign a monthly contract. For example, buying straddles or strangles before the RBI makes an announcement.
Protecting Short-Term Portfolios
Instead of putting money into long-term contracts, investors can use weekly options to protect their equity holdings from short-term risks.
Less money needed
Weekly contracts let people with less money take part, which is great for retail traders who find monthly contracts too expensive.
What are the risks of weekly options?
High Volatility on Days of Expiration
There are often big swings in the price of stocks during weekly expiry sessions, which can cause sudden gains or losses.
Risk of Time Decay for Buyers
Option buyers have to deal with a lot of time decay as the expiration date gets closer. If the underlying doesn't move as expected, premiums can go down quickly.
Sellers Have No Limits on Risk
Selling options can make money, but the risks are theoretically endless if the market moves sharply against the position.
Retail Participants Are Trading Too Much
The low cost of weekly options makes people trade too much, which causes many retail traders to lose money quickly.
Mispricing of Events
Traders who are getting ready for events may have to deal with unexpected volatility crushes, where premiums drop after the event no matter which way they go.
A Look at Bank Nifty Weekly Options
Bank Nifty weekly options are some of the most traded contracts in the world. On days when contracts expire, the value of the trades often goes over lakhs of crores. Some traders make money by taking advantage of small price changes throughout the day, while others lose money when institutional flows cause prices to suddenly change direction.
For instance, a trader who buys a Bank Nifty call option for 200 premium may see it go up to 350 in an hour, then drop to 50 later in the day. The short life of weekly contracts makes both chances and risks bigger.
Plans for Weekly Options
Straddles and strangles for trading based on events.
Credit spreads help you manage risk when you sell options.
Iron Condors make money when prices stay within a certain range.
Direction Buying calls or puts to make quick moves, but always with a stop-loss.
Conclusion
Weekly options have changed the way derivatives are traded in India. They give people a lot of chances, make it cheaper to participate, and let people hedge and speculate. At the same time, they come with a lot of risks, especially for retail traders who don't follow the rules and don't understand how time and volatility affect prices.
Weekly options are a double-edged sword: they can be very useful for people who know how the market works, but they can also be a trap for people who are drawn to their low premiums without a good plan or risk management.
