The National Stock Exchange’s (NSE) move to shift the weekly and monthly expiry day for Nifty contracts to Monday from Thursday will result in higher implied volatility and premiums for options traders.
Traders writing options contracts a day before expiry carry an overnight risk as the options expire the next day. If this is done on a Friday, options sellers will have to brace for a weekend risk instead of an overnight one. This will compel options sellers to ask for higher premiums which, in turn, could impact the options volumes as options buyers may be hesitant to shell out more money. Algo traders will also have to recalibrate their strategies and models based on the Monday expiry.
Increased risks
“Traders will have to account for global events over the weekend, which could lead to unexpected gap-ups or gap-downs, increasing risks. Frequent change in expiry day can make markets unpredictable and complicate risk management for traders,” said a broker.
At present, the weekly and monthly trading is concentrated on Mondays and Tuesdays for BSE (which has a Sensex expiry on Tuesday) and Wednesdays and Thursdays for NSE (Nifty expiry on Thursday).
Exchanges have been resorting to reshuffling their expiry days in a bid to boost their business, said Deepak Jasani, an analyst. BSE has been gaining share over the last few months, whereas NSE’s share has remained more or less stagnant or fallen slightly, he said.
Impact on BSE
“The shift in expiry to Monday may help NSE take some share of the Monday business from BSE. It remains to be seen if BSE will react to this change and shift its expiry day again,” said Jasani, adding that traders will adjust to the new normal in a few weeks.
Shares of BSE tanked as much as 9 per cent intraday on Wednesday before closing 3.7 per cent lower.
No SEBI approval is required for changing the day of expiry. BSE had changed the monthly expiry days for Sensex, Bankex, and Sensex50 to the last Tuesday of every month from January 1. Sensex’s weekly contracts also expire on Tuesdays.
“Other exchanges may start their own contracts on different days of the week. We have decided to change our expiry to Monday based on the feedback we have received from market participants. If overwhelming feedback comes in some other direction, we will be willing to look at it at some other point in time,” said Sriram Krishnan, Chief Business Development Officer, NSE.
Thursday has historically been the expiry day for Nifty and this is the first time the exchange is attempting a change in expiry day for the index.