Five people familiar with the approach who requested not to be named because they were disclosing private information said that the trade, or variants on it, is based on a wager that Indian stock indexes would move within very limited ranges.
Many trading businesses are using a very straightforward technique in a market that has drawn attention from the global financial community for purportedly generating $1 billion for Jane Street Group: short volatility.
Five people familiar with the approach who requested not to be named because they were disclosing private information said that the trade, or variants on it, is based on a wager that Indian stock indexes would move within very limited ranges. According to the individuals, substantial sums of money are used to increase derivatives bets in the biggest options market in the world based on the volume of traded contracts.
According to the individuals, ordinary investors and long-only funds purchase contracts to hedge against abrupt market declines or make speculative wagers, while high-speed traders sell options.
None of these deals seem to have been used in Jane Street's billion-dollar plan, which it is required to describe to a US District Judge by May 23. A Jane Street representative from outside the company refused to comment.
The gamble has paid off so far, as India's increasing affluence and a move away from China by international asset managers have gradually increased the country's stock market value. According to statistics provided by Bloomberg, just nine of the previous 500 trading days saw a 2% or more movement in the nation's stock benchmark. However, the approaches may be dangerous, leaving businesses vulnerable to enormous losses in the case of abrupt, significant changes.
The Indian options market gained attention last month when Jane Street sued two former workers, claiming they brought a trade secret regarding Indian options to their new positions at Millennium Management. This raised questions about how they may have made money. According to persons familiar with the situation, two Hong Kong traders left Societe Generale SA as a result of taking risks with their derivatives bets.
Optiver, Citadel Securities LLC, IMC Trading BV, and Jump Trading, along with a plethora of other companies and hedge funds, have all been growing in India, even though none of the trading businesses have revealed their techniques.
Selling calls and puts at separate strikes or at the same strike has been a popular tactic. The sellers of these so-called strangles and straddles wager that any loss resulting from an index change will be more than compensated by the premium they get in both scenarios.
According to one of the persons, trading businesses make money not only by shorting volatility but also by consistently offering to purchase and sell on a variety of options in the hopes of profiting from the difference between the ask and bid prices.
According to Abhilash Pagaria, a quant strategist at Nuvama Wealth Management, which manages trades for some high-frequency businesses, "shorting volatility, writing puts, and writing calls is their mainstay."
About 35% of index option transactions in India are made by retail investors, and 90% of active retail traders are thought to lose money on derivatives, according to the market regulator.
Compared to US and Hong Kong stocks, the volatility of Indian shares has been lower over the previous year, but traders are expecting possible fluctuations surrounding the results of the parliamentary election, which are scheduled for early June.
According to Amit Kumar Gupta, the founder of New Delhi-based money manager Fintrekk, significant increases in volatility are bad news for algorithmic traders, who often trade derivatives of India's benchmark Nifty 50 or Nifty Bank Index. High-frequency traders might be killed by gap ups and downs, he said.
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