Sensex trading frenzy spawns ‘Options Warriors’

Vibhuti Mohapatra, who lives in Nagpur and provides maths tuitions, is keeping very busy nowadays. Strangely, Vibhuti’s time is being consumed not in teaching nuances of maths but calculating Option premiums and how to juice them.

Rohit Pawar was a business analyst with a multinational company. During the Covid-19 lockdown since March 2020, Rohit started reading about options and slowly dabbling in index futures and options. Today, Rohit has left his high paying job and does Option Selling daily. Within one year, he became so confident that he has established his Option Trading Proprietary Firm in Navi Mumbai and is involved in option selling in Indian markets, full time.

These are not a few isolated cases. The massive bull run in the last 18 months has made equity trading one of the favourite full-time occupations among the youth and a new crop of Future and Option (F&O) warriors are redefining the Indian share market.

This F&O frenzy can be spotted in numbers too. Sample this, the market-cap of all listed companies in India today is ₹250 lakh crore. But on September 2, trading volume in the Future and Options segment crossed ₹100 lakh crore. This is not the only time this has happened. Two days in July and three days in August, turnover in the F&O segment on NSE crossed ₹100 lakh crore. This implies that in a single day, over 40% of the total market capitalization of Indian stocks are just getting traded in the Future and Options segment alone. This is both an unprecedented and a recent phenomenon.

India is in a grip of a trading frenzy and retail investors are the potent force driving this trading mania. Every month over a million new retail investors are knocking on the door of Indian share markets.

Old-timers and market veterans are surprised to see enhanced retail participation. Speaking to Fortune India, Raamdeo Agarwal, the co-founder and chairman of Motilal Oswal Group, says India is witnessing a 'Silent Revolution'. Every month 10 lakh new investors are coming to the Indian equity market "Earlier what used to happen in a year, now that is happening every month," Agarwal said.

"This is insane and retail investors are the potent force behind these crazy volumes," said Agarwal. He says that if this frenzy continues, then within three to four years daily trading volume may cross ₹200 lakh crore.

Adding fuel to the fire are low-interest rates that are making fixed and debt instruments unattractive. Moreover, low rates are compelling Indian households to take some risk with equity markets. Currently, there are approximately four crore retail investors in the Indian market. "What if from four crore, retail investors number moves up to 10 crore?" asked Amol Rao, a former fund manager with Michael Dell Family Office in India. Experts feel that if the bull run continues then it may permanently alter the structure of the Indian market. Rao believes that with low returns on debt and fixed instruments, retail and HNI investors are left with no other option but to park money in the stock market.

Sandeep Shenoy, a market veteran and executive director of Mumbai-based Investment Boutique Firm Pioneer Invest Corp, says today retail and FIIs are making a fine balance between Indian equities. Any selling by FIIs is now easily being absorbed by retail investors. Shenoy believes that if small saving schemes start pouring into the Indian market, then market base case P/E may change to 22 to 24 times which is generally 16 to 18 times. It means that an investor who was earlier willing to pay ₹16 for ₹1 profit is now willing to pay ₹22 for ₹1 profit. Such high P/E (₹22 to ₹24) will become the general norm and growth would be chased more feverishly that may lead the Nifty P/E to 40-42 times in a euphoric environment.

Paul Gray and Siddharth Singhai, who run a New York-based Ironhold Capital hedge fund say that historically, highly elevated P/E multiples could suggest that the market is overvalued and since the market has to eventually resemble the reality of the economy—it could lead to mean reversion.

Raamdeo Agarwal is baffled about this massive euphoria and says the investment is now turning into speculation which may not end up well for everybody. "Retail investors are speculating too much. It is difficult to answer whether this speculation is due to bull run or the bull run is due to retail speculation," Agarwal said.

Market veterans are worried because the new crop of F&O Warriors has not seen a downturn. For the past 18 months, it was a one-way move, that is up, for the market. Leverage and buy on dip were the only games in town.

Kaitav Shah, a financial consultant with the Lodha Family office also sounds cautious. He believes discount brokerages have made too much trading a new normal. “Current crop has not seen a massive downturn which is making them daredevilish in amassing massive risk that may turn into tears for some,” he says.

But it seems that the retail investors are also upping their game by learning the moves. Rajendra Agarwal, a Pune based equity trader and old-timer in the market, is a busy guy who trains market wannabes about technical skills of trading. Every week, Agarwal is busy imparting training to at least two dozen newcomers to market trading and this number is swelling every week. Rajendra Agarwal says investors from Singapore are now contacting him to understand his trading methodologies and patterns.

Driven by the paucity of saving options, job uncertainties and plenty of time to up-skill thanks to lock-downs and WFH, the new crop of retail players are changing and challenging the way in which the Indian stock market used to behave.

Rohit Pawar throws the caution from the veterans out of the window and says that making money was never so easy. Retail is not here to get a 7% return annually when a 7% weekly return is possible by playing a clever hand in the F&O segment. "I am not going back to join the workforce again as I am making many times more through trading than what I used to earn slogging day and night for a company," Pawar said.

Vibhuti concurs, saying if working for four hours gives you more than what working for eight hours fetch you, then why would you opt for the latter?

Whether the market will prove the veterans' fears true or the newfound enthusiasm of the option warriors is something only time will tell. How long such bounty hunting in the trading world will go on is difficult to guess, but Shenoy has a view- the market never corrects when people think it will correct. It corrects when investors start saying, this time is different, and that time has not yet come.

Views expressed are personal.