In a post on X, Kamath said that serious hedgers typically rely on options contracts with maturities of 30 days or longer, but after the weekend the market has shifted increasingly toward shorter-term contracts.
According to data shared by Kamat, the open interest (OI) structure of Nifty index options has changed rapidly over the past decade. In 2015, contracts that expire within 0-7 days accounted for about 18.8% of all index options open interest. Today, this share has increased to around 60.4%, reflecting the significant concentration of trading in near-term contracts.
Meanwhile, the share of 16-30 day contracts has fallen from around 30% in 2015 to around 12% now, indicating that longer-term options, typically used for portfolio hedging, have lost liquidity.
Kamath said the change was more dramatic when measured in terms of trading volumes. Total index options contracts traded per quarter increased from about 564 million in 2015 to 34.9 billion in the third quarter of 2024, representing a nearly 62-fold increase.
However, he noted that growth was driven almost entirely by contracts with maturities of less than seven days, suggesting that the increase in activity reflected speculative trading rather than traditional risk management.
“The market has structurally shifted from hedging to speculation,” Kamath said in his post. While the increase in liquidity is positive for market participation, he warned that it has created imbalances in the structure of the options market. Liquidity is now heavily concentrated in very short-term contracts, while long-term options, which institutional investors and portfolio managers use to hedge risks, have declined relatively.
This imbalance is particularly pronounced in periods of high instability, such as the current geopolitical tensions involving Iran, Israel, and the United States.
During such events, investors looking to buy protection through long-dated options often find it difficult to implement meaningful hedges as liquidity in these contracts dries up, Kamath said.
“When volatility increases, it’s difficult to get meaningful insurance right when people need it,” he said.
He argued that a healthy derivatives market should offer liquidity across multiple time horizons, including 30-day, 60-day and 90-day contracts, rather than focusing on the near-week end.
To address the imbalance, Kamath suggested that regulators and exchanges could consider price incentives to encourage long-term options trading. Measures such as lower securities transfer tax (STT), reduced exchange charges and lower brokerage charges for option positions beyond 30 days can help attract more activity to long-term contracts.
