India’s booming derivatives market has become one of the most active in the world, with trading volumes exploding over the past decade. But according to Zerodha co-founder Nithin Kamath, the structural shift in the market—especially the dominance of weekly options contracts—may be making it harder for serious investors to hedge their risks.
In a recent post on While the surge in liquidity has boosted participation and trading activity, it may also be crowding out longer-dated contracts that professional traders rely on for hedging.
The issue becomes particularly visible during periods of market stress, such as geopolitical events like the Iran–Israel–US conflict, when investors look for protection against volatility.
“Hedging with Nifty options has gotten structurally harder, especially around events like the Iran-Israel-US conflict. Serious hedgers typically use contracts that are 30 days or longer. But thanks to weekly expiries, the OI profile of the market has changed dramatically,” Kamath wrote.
The rise of weekly options
Over the last decade, India’s options market has seen explosive growth. Kamath highlighted how the distribution of open interest (OI) has shifted dramatically towards extremely short-term contracts.
As per a graph shared by Kamath, in 2015, options with 0–7 days to expiry accounted for just 18.8% of index open interest. Today, that share has surged to 60.4%, reflecting the massive popularity of weekly options trading.
Meanwhile, longer-dated contracts have lost ground. The 16–30 day expiry bucket, which once represented around 30% of open interest, has now dropped to just 12%.
The shift becomes even clearer when looking at trading volumes.
According to Kamath, total index options contracts traded rose from 564 million per quarter in 2015 to a peak of 34.9 billion in Q3 2024—an astonishing 62-fold increase. Most of that growth, he said, has come from ultra-short-term contracts with less than a week to expiry.
This transformation has effectively turned the market into a hub for short-term speculation rather than risk management.
“The market has structurally shifted from hedging to speculation. Liquidity has exploded, which is good. But genuine hedging has gotten harder because liquidity has dried up at the longer end,” Kamath highlighted.
Why the imbalance matters
For long-term investors and institutional traders, derivatives are meant to function as insurance against market volatility. But if most liquidity is concentrated in contracts expiring within days, meaningful hedging becomes more difficult.
Kamath noted that this imbalance becomes especially problematic during major market shocks. When volatility spikes, traders often rush to buy protection—but the lack of depth in longer-dated contracts can make that protection expensive or hard to obtain.
“When volatility spikes, buying meaningful insurance is difficult precisely when people need it most. A healthy market needs to offer solutions across different risk horizons, not just the next seven days,” he said.
He added that serious market participants require sufficient liquidity in 30-, 60- and even 90-day contracts to properly manage risk.
So how do you fix this?
According to Kamath, there are multiple potential solutions that could gradually shift trading activity back toward longer-dated options.
One approach, he said, could be reducing costs for holding longer-term derivatives, including lowering securities transaction tax (STT), exchange fees or brokerage charges for contracts with expiries beyond 30 days.
“Lower STT, lower exchange charges, lower brokerage for positions beyond 30 days is a reasonable start. Small price signals that make longer-dated contracts cheaper to hold should gradually draw volume back toward the tenors where real hedging happens,” Kamath wrote.
Such incentives could encourage traders and institutions to move some activity away from ultra-short-term contracts and restore balance to the derivatives ecosystem.
For now, however, India’s options market remains heavily tilted toward weekly expiries—a sign of its extraordinary growth, but also a reminder that liquidity alone does not guarantee stability.
As Kamath’s remarks suggest, the next phase of market evolution may depend on whether policymakers and exchanges can ensure that derivatives markets serve not just traders seeking quick profits, but also investors looking to manage risk over longer horizons.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
