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

Nithin Kamath, co-founder of Zerodha, has raised concerns about a significant shift in India's options market, emphasizing that the surge in weekly options trading is hindering investors' ability to effectively hedge risks, particularly amid geopolitical uncertainties. In a recent post on X, he highlighted that serious hedgers typically prefer options with maturities of 30 days or longer; however, the market is increasingly dominated by ultra-short-term contracts. Data reveals that the share of contracts expiring within 0-7 days has escalated from 18.8% in 2015 to approximately 60.4% today. Meanwhile, the proportion of 16-30 day contracts has plummeted from about 30% to merely 12%, indicating a liquidity crunch for longer-dated options that are essential for risk management. Kamath pointed out that while total index options traded have surged from 564 million in 2015 to nearly 34.9 billion in Q3 2024, this growth is primarily fueled by speculative trading rather than genuine hedging activities. He cautioned that during volatile periods, such as current geopolitical tensions involving Iran, Israel, and the U.S., liquidity for longer-dated options is severely limited, making it challenging for investors to secure adequate protection when it is most needed. Kamath advocates for regulatory measures to restore balance in the options market, including incentives for trading longer-tenor options.