India's Stock Market Turns Calm: Will Derivatives Traders Find New Ways to Profit?

India's stock market has become one of the calmest in the world, prompting a rethink of strategies among players in the country's vast derivatives space. Despite geopolitical flare-ups and a recent global selloff in risk assets, the NSE Nifty 50 Index has barely budged for months.

The Calm Market

Domestic money has overwhelmed foreign flows, and derivatives trading curbs have choked off volatility. The India NSE Volatility Index, a gauge tracking expectations for future swings, ended at an all-time low. This has made it harder for traders to profit from well-known strategies.

Impact on Traders

Volatility is the engine of derivatives trading. When markets swing, investors pay up to hedge, and the cost of contracts rise. When stocks are calm, premiums shrink, eroding returns for option sellers and leaving traditional strategies less profitable.

• The market has become more efficient and competitive, resulting in lower returns for standard vol-selling strategies.
• Trading desks will have to increase risk to make better returns.

Changes in the Market

A turning point came last year when the Securities and Exchange Board of India launched a crackdown aimed at curbing speculative retail activity. The regulator scrapped several popular weekly options, cutting out products that amplified intraday swings and dried out volume.

The impact is clear: notional turnover has averaged almost 240 trillion rupees ($2.7 trillion) a day this year, down 35% from 2024. This drop in derivatives activity has fed back into the underlying market.

New Challenges

The Nifty 50 has moved less than 1.5% for 151 consecutive sessions, and its three-month realized volatility has slipped toward 8 points — lower than in any major global market. Meanwhile, foreign funds have pulled some $17 billion this year, while local institutions have become the market's biggest owners.

The tranquility hasn't translated into big rewards for equity holders. The Nifty 50 has gained 9.8% this year, much less than the 27% advance in the MSCI Emerging Markets Index and the 20% rise in the MSCI All-Country World Index.

Looking Ahead

For derivatives traders, the new regime is forcing a rethink. Strategies built around selling options and rolling short-term positions may not yield as much as they used to. The elimination of short-dated contracts leaves fewer ways to express near-term views or capture premiums.

Remember, this is a perspective, not a prediction. Do your own research before making any investment decisions.