India's stock market has become one of the calmest in the world, with the NSE Nifty 50 Index barely budging for months. This sudden lack of volatility is prompting traders to rethink their strategies, as traditional methods of profiting from derivatives trading are no longer yielding the same returns.
The calmness in the market can be attributed to the overwhelming flow of domestic money and the reduction in foreign flows. Additionally, the Securities and Exchange Board of India's crackdown on speculative retail activity has led to a decrease in volatility. The regulator scrapped several popular weekly options, which had previously amplified intraday swings and increased volume.
The decrease in derivatives activity has had a significant impact on the market. Notional turnover has averaged almost 240 trillion rupees ($2.7 trillion) a day this year, down 35% from 2024. This drop in activity has fed back into the underlying market, with the Nifty 50 moving less than 1.5% for 151 consecutive sessions.
The market's players have also changed, with foreign funds pulling out some $17 billion this year. At the same time, local institutions have become the market's biggest owners, pouring a record surpassing $80 billion into shares since January.
The tranquility in the market 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. One drag is valuation, with India's benchmark gauge trading at 20 times projected earnings, above its five-year average.
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 and consider your own risk tolerance before making any investment decisions.
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