The world’s quietest stock market challenges options traders in India

India’s stock market has become one of the calmest in the world – so calm that it is prompting a rethink of the strategies of players in the country’s vast derivatives market.Despite geopolitical flare-ups and a recent global sell-off in risky assets, the NSE Nifty 50 Index has barely moved in months as domestic money overwhelms foreign flows and derivatives trading limits volatility. The India NSE Volatility Index, a gauge that tracks expectations for future swings, ended at an all-time low on Friday.

For the traders who power the world’s largest options market by volume, it is becoming more difficult to profit from the well-known strategies. Volatility is the engine of derivatives trading: when markets fluctuate, investors pay to hedge, and the cost of contracts rises. When stock prices are calm, premiums fall, reducing returns for option sellers and making traditional strategies less profitable.

“The market has become more efficient and competitive – that means lower returns for standard full-sell strategies,” said Nitesh Gupta, partner and derivatives trader at Karna Stock Broking LLP. “In this environment, trading desks will need to increase risk to deliver 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 tackling losses among individual traders. The regulator cut several popular weekly options and removed the very products that had amplified intraday swings and dried out volume.

The impact is clear: Although activity has recovered from February’s low, notional sales averaged almost 240 trillion rupees ($2.7 trillion) per day this year, down 35% from 2024. It is the first annual decline on record dating back to 2017.

That drop in derivatives activity has spilled over into the underlying market, with the Nifty 50 up less than 1.5% for 151 consecutive sessions, a run approaching its 2023 record, and three-month realized volatility down to 8 points – lower than any major global market.

In the meantime, the players in the market have changed. Foreign funds have raised about $17 billion this year – more than ever before – due to trade tensions with the US and a lack of stocks due to the artificial intelligence boom. At the same time, local institutions have become the market’s biggest owners, pouring a record more than $80 billion into the stock since January. They overtook foreigners in the first quarter, according to figures from the data provider primeinfobase.com back to 2009.

The calm has not translated into big rewards for shareholders. The Nifty 50 is up 9.8% this year, much less than the 27% rise in the MSCI Emerging Markets Index and the 20% rise in the MSCI All-Country World Index.

One drag is valuation: India’s benchmark trades at 20 times expected earnings, above the 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 forces a reconsideration. Strategies often built around selling options and rolling over short-term positions may not yield as much as they used to, said Bhautik Ambani, CEO of AlphaGrep Investment Management Pvt. And the abolition of short-term contracts means there are fewer opportunities to express short-term visions or collect premiums.

“The low volatility and reduction in the number of weekly options contracts have hurt strategies that benefit from selling options,” Ambani said. But volatility is likely to pick up again; it is simply too low at the moment, he added.