World’s calmest stock market challenges options traders in India

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India’s stock market has become one of the calmest in the world — so calm that it’s 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 as domestic money overwhelms foreign flows and derivatives trading curbs choke off volatility. The India NSE Volatility Index, a gauge tracking expectations for future swings, ended Friday at an all-time low.

For the traders powering the world’s largest options market by volume, that’s making it harder to profit from the well-known strategies. 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.

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“The market has become more efficient and competitive — that’s meant lower returns for standard vol-selling strategies,” said Nitesh Gupta, partner and derivatives trader at Karna Stock Broking LLP. “In this environment, trading desks will have to increase risk to make better returns.”

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

The impact is clear: While activity has bounced off from a low in February, notional turnover has averaged almost 240 trillion rupees ($2.7 trillion) a day this year, down 35% from 2024. It’s the first annual decline since data going back to 2017.

That drop in derivatives activity has fed back into the underlying market: The Nifty 50 has moved less than 1.5% for 151 consecutive sessions, a run that’s nearing a record set in 2023, and its three-month realized volatility has slipped toward 8 points — lower than in any major global market.

Meanwhile, the market’s players have changed. Foreign funds have pulled some $17 billion this year — more than ever before — amid trade tensions with the US and a lack of shares tied to the artificial intelligence boom. At the same time, local institutions have become the market’s biggest owners, pouring a record surpassing $80 billion into the shares since January. They overtook foreigners in the first quarter, according to figures from data provider primeinfobase.com going back to 2009.

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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.

One drag is valuation: India’s benchmark gauge trades at 20 times projected earnings, above its five-year average and far richer than the 13 times for the broader emerging-markets index, according to data compiled by Bloomberg.

For derivatives traders, the new regime is forcing a rethink. Strategies often built around selling options and rolling short-term positions may not yield as much as they used to, according to Bhautik Ambani, chief executive officer at AlphaGrep Investment Management Pvt. And the elimination of short-dated contracts leaves fewer ways to express near-term views or capture premiums.

“The low volatility environment and reduction in weekly options contracts have hurt strategies that profit from options selling,” Ambani said. But volatility is likely to rebound — it’s just too low right now, he added.

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