Thursday, February 24, 2011

Rapid buildup of currency options open interest

Today, on NSE, derivatives trading showed the following numbers:

 Product class Turnover (Billion rupees) Index futures 353 Index options 1981 Stock futures 391 Stock options 48 Currency futures 178 Currency options 30 Total 2981

This is really something: Rs.2.98 trillion notional rupees in a day. It's starting to sound like a real market.

This data shows an incredible domination of Nifty futures and options. It also shows the massive success of Nifty options.

One element of the options to futures ratio with equities lies in the securities transactions tax, which has distorted the market in favour of options. In the case of currencies, this distortion is absent. Hence, the ratio of options to futures that we see there should reflect the undistorted applications of the products by the market.

Now that the NSE trading community has skills on options, the question arises: Do these skills readily port over into currency options? I believe they should: every good Nifty options trader is a good INRUSD options trader. The same options knowledge should pretty much carry over from equity stock or equity index options to currency options. In fact, with small modifications, the algorithmic trading that is being done on the equity options should readily deploy into the currency options.

So what does the evidence show? Currency options trading (INR/USD only, says the RBI) started on 29 October 2010. I have 117 trading days of data for the open interest of INRUSD options. Let's compare the rise of open interest starting from contract launch: