SEBI has introduced some changes in the rules for trading in derivatives.
Among many changes, one is the change in expiry where each index could have a single weekly expiry.
Considering the same, NSE & BSE decided to remove BankNifty & BankEx from the list of weekly expiry from Nov 18 onwards.
Now how this change will impact the market volatility, liquidity, and above all how it is going to change the activities of options traders.
Let’s break down the potential impact:
Impact of Closing Weekly Expiry in Banking Index
The concept of weekly index expiries has become an integral part of trading strategies, especially for retail traders.
But is the idea of closing weekly expires going to bring some changes for good?
Is it planned and executed keeping the interest of retail traders in mind? Well, for that here are some of the major impacts with which one can reach the right conclusion.
1. Impact on Short-Term Traders: Reduced Trading Flexibility
Weekly expiries in index options like Bank Nifty provide retail traders the opportunity to capitalize on short-term price movements.
This is especially appealing for those with smaller capital who can’t afford to tie up their money for longer durations.
If weekly index expiries are closed, retail traders would lose a key tool that allows them to execute quick trades, limiting their flexibility and opportunity to profit from short-term volatility.
Let’s simplify this.
So, with weekly expiry small retail traders used to take advantage of the quick price moves that happen during the last day or hours of the expiry week.
Now, shifting to a monthly expiry could mean waiting longer for similar opportunities.
This may also reduce the frequency of profitable trades for those using weekly strategies like option selling to benefit from rapid time decay.
On the other hand, there are some benefits too.
These traders with small capital in hand are generally beginners and hardly have an understanding or knowledge of options trading. Entering into such short-term trades only increases their losses over time which leads them to exit trading permanently.
Hence, with weekly expiry, the number of loss-making traders might be reduced.
2. Market Volatility and Liquidity: A Calmer Market?
Weekly expiries often cause spikes in volatility, especially towards the end of the week, which many traders use to their advantage.
By eliminating these expiries, the market may see reduced volatility, particularly on Thursday when most traders gear up for the “expiry day moves.”
Additionally, the high liquidity in weekly expiries might shift to monthly options.
However, this could still limit the number of trading opportunities, particularly for traders who prefer shorter time frames.
But with the reduction in volatility further reduces the overall market risk, hence creating a low-risk environment for retail traders.
However, if we look at the liquidity, low liquidity in option contracts would make it difficult for small trader to take or exit their position.
3. Challenges for Option Sellers: Longer Wait for Time Decay
Now, after facing loss or less opportunity in options buying, retail traders prefer selling in options.
Most of the successful options traders were able to make a profit by taking positions in weekly expiries by capturing premiums through time decay (Theta).
With weekly expiries, the time decay accelerates towards the end of the week, allowing traders to lock in profits relatively quickly.
If weekly expiries are no longer available, traders would have to adapt to monthly contracts, where time decay is spread out over a longer period.
This could potentially increase the risk, as price movements over a month can be more unpredictable compared to a week.
Further, weekly expiries allow option sellers to hedge their positions by deploying strategies like covered call and iron condor.
The absence of weekly expiries would require them to adjust their strategies for longer time frames which would increase the risk exposure due to unexpected events or news.
4. Shifting Market Sentiment: Fewer Speculative Moves
Weekly expiries often attract speculative trading, which can influence market sentiment and trends.
Removing them could potentially stabilize markets but would also reduce the speculative action of retail traders.
With fewer opportunities for short-term speculation, market participants may lean towards longer-term strategies, shifting the overall sentiment in the market.
What Retail Traders Should Prepare For?
Now to adapt to this change, it is high time for retail traders to bring change in their trading style by:
- Adapting Strategies: Retail traders who depend on weekly expiries will need to shift towards monthly or longer-term strategies, possibly focusing more on stock-specific opportunities or longer-dated index options.
- Rebalancing Risk: The elimination of weekly expiries means more exposure to the unpredictable nature of the markets over a longer period.
This makes it essential for traders to plan better risk management and careful position sizing to avoid sudden market shocks that could affect open positions. - Educating Themselves: Retail traders would need to invest more time in learning how to adapt to monthly expiries, including understanding longer-term option Greeks like Theta and Vega, which behave differently over extended periods.
Is It All Bad News for Retail Traders?
While the removal of weekly index expiries might feel like a setback for many retail traders, it’s an opportunity to evolve. By mastering longer-term strategies and focusing on risk management, traders can reap the advantage of fewer but profitable opportunities.
It may encourage a more disciplined and risk-aware approach to trading and using options actually as a hedging product that defines it better.
However, retail participants should prepare themselves for a shift in liquidity, volatility, and the overall structure of their trading strategies.
The key takeaway for retail traders is to stay informed, continuously adapt, and develop strategies that can work well even in the changing trading environment under monthly expiries.
Staying ahead of the curve with updated strategies and risk management techniques will be the new game in town.
