Nithin Kamath says genuine hedging in options market is now harder due to heavy speculation

In a post on X, Kamath said serious hedgers typically rely on options contracts with maturities of 30 days or longer, but the market has increasingly shifted toward ultra-short-term contracts following the rise of weekly expiries.

According to data shared by Kamath, the open interest (OI) structure of Nifty index options has changed sharply over the past decade. In 2015, contracts expiring within 0-7 days accounted for about 18.8% of total index options open interest. Today, that share has surged to around 60.4%, reflecting a significant concentration of trading in near-term contracts.

At the same time, the share of 16-30 day contracts has dropped sharply from around 30% in 2015 to just about 12% now, indicating that longer-dated options, typically used for portfolio hedging, have lost liquidity.

Kamath said the shift has been even more dramatic when measured in terms of trading volumes. Total index options contracts traded per quarter have surged from about 564 million in 2015 to a peak of 34.9 billion in the third quarter of 2024, representing a roughly 62-fold increase.

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However, he noted that the growth has been driven almost entirely by contracts with maturities of less than seven days, suggesting that the surge in activity reflects speculative trading rather than traditional risk management.

“The market has structurally shifted from hedging to speculation,” Kamath said in his post.While the surge in liquidity is positive for market participation, he warned that it has created an imbalance in the options market structure. Liquidity is now heavily concentrated in very short-dated contracts, while longer-tenor options, which institutional investors and portfolio managers use to hedge risks, have become relatively thin.

This imbalance becomes particularly visible during periods of elevated volatility, such as the current geopolitical tensions involving Iran, Israel and the United States.

Kamath said that during such episodes, investors looking to buy protection through longer-dated options often find it difficult to execute meaningful hedges because liquidity in those contracts has dried up.

“When volatility spikes, buying meaningful insurance is difficult precisely when people need it most,” he said.

He argued that a healthy derivatives market should offer liquidity across multiple time horizons, including 30-day, 60-day and 90-day contracts, rather than concentrating almost entirely on near-week expiries.

To address the imbalance, Kamath suggested that regulators and exchanges could consider pricing incentives to encourage longer-tenor options trading. Measures such as lower securities transaction tax (STT), reduced exchange charges and lower brokerage costs for options positions held beyond 30 days could help attract more activity to longer-dated contracts.