'There's more to the story..': Zerodha's Nithin Kamath explains the options trading 'exuberance'

Retail participation in options trading has soared through the roof in the last four years. According to Zerodha's Nithin Kamath, the number has gone up from a mere 8 lakh in FY19 to 45 lakh in FY23. But is it all exuberance? 

"Starting in 2020, the share of corporates, foreign investors, and DIIs in option turnover dropped from about 30% to 9.9%. This is primarily due to the market-wide position limit of Rs 500 crore (5,000 lots of nifty), which was introduced during COVID 19 in March 2020. That means no one can hold the derivative unhedged position of more than Rs 500 crore or 5000 lots," Kamath posted on X . 

"So, the contribution of corporates and FII/DII traders has slowly fallen, and hence, the share of individual investors and prop has gone up".

In 2023, Indian investors traded 85 billion options ­contracts, more than anywhere else in the world. In India retail investors make up 35% of options trades. Institutions, seeking to hedge their risk or profit for their companies’ accounts, handle the rest. 

Regulators are also concerned that regular folk are bypassing the tried-and-true way to build wealth: buying and holding stocks and mutual funds.

India’s rapidly expanding middle class has long stashed its savings in real estate and gold. Households have only 7% in equities and mutual funds, compared with more than 40% in Brazil and China and 50% in the US. As a result, small investors have largely missed out on India’s stock market boom, which may be fueling some fear-of-missing-out trading now.