SEBI approves extension of trading hours on stock exchanges


#43

So I wrote this on the Sensibull Blog on Medium about what will change because of this move. Copy pasting for convenience. You can read on Sensibull on Medium here as well.
Here goes:

“That was a total dick move” — Someone at SGX

First things first. None of this might go through because SEBI has allowed this does not mean NSE or BSE will implement it. Having said that, there is a very high chance of this going through given the recent SGX developments.

Before we get into the option math of what would happen, let us look at simple things on a lighter note.

Option traders- Poor guys had a life after 3:30, now they do not. Which also means Bombay is the only city to trade now, given the party starts after midnight there. The only place which remains open after 11:55 in Bangalore is the chaiwala on the cycle on Madiwala Junction.

Interesting life for Retail F&O junta — These guys worked day jobs, and occasionally sneaked out and traded during office hours. But now they will go home and trade. I am worried for their wives and girlfriends.

Less gambling now — If you take a position when a US event such as FOMC, or NFP, or US GDP is going to come in the evening, you are gambling. Now we will see less of that. In short, around 11:55 is a good time to place your bets. And it’s more predictable, and less of a gamble.

Hours of volume might shift - In long hour markets such as FX, most of the volume happens during London Open, US Open, and London close. We could potentially see such a shift. If you do not like the mornings, hurrah!

NRI Community can now trade F&O. The more participants the merrier, right?

All those TV channels which give gyaan about markets — they will double their ad revenues now.

Okay, so what will happen to the market?

  1. The number of violent gap up and gap down openings will come down.
  2. Implied volatilities on stocks and indices will go down.

The number of gap up and gap down openings will go down simply because the nasty overnight surprises coming from overseas, especially the US, are not overnight surprises anymore.

  • Most data releases in the US happens around 6:30 India Time. Now they will happen during India hours. Even the late ones such as FOMC which happen at 11:30 IST will give 15 minutes for India to react. The only exception is Daylight Saving Time adjustment (DST) from November to March. DST sets clocks in the US back by 1 hour. So we will miss a few events which happen at 12:30 in the night IST during DST adjustment months. Let’s ignore that.
  • A lot of US markets action will now happen during India hours, which means we will react while the US is reacting, which leads to a continuous adjustment rather than gap jumps.
  • We will now trade during London and EU closing hours, which takes care of most of the European markets and certain other asset classes such as FX and commodities.

Okay, so how does implied volatility on every single stock and index out there come down?

Implied volatility is a measure of uncertainty in the market. It says how unpredictable the option sellers think the markets are. The biggest uncertainty an option seller faces is the overnight gap risk. The daytime volatility is something which traders can easily manage. If there are no gaps, it is much easier for traders to sell options and manage their risks. So a large part of Implied Volatility is about the gaps will on opening. With less and smaller gaps there is lower uncertainty.

Thus, the implied volatility will fall.

What about the effect on market participants?
Good for institutions who sell options with continuous delta hedging. Now they have a better shot at continuity of hedging. Continuous delta hedging needs VERY large positions. So we are talking of the large institutions.

Bad for option sellers who sell without continuous delta hedging, because the IV, and hence the absolute premium on options is now lower. Smaller players, and any retailers will be worse-off

Silver lining for retailers- Option buying will be a better game if IVs will fall. I think it will still be a bad game. It will become a less loss-making game from a massive loss-making game.

In the next post on the blog we will see why IV will drop if there are no gap openings. Here is where the fun starts. That should be out in 2 days. Read that only if you like that kind of stuff please.

Here is the link to Part 2


#44

@Abid_Hassan extended hours is appicable to only index trading or it includes equities trading also pl clarify


#45

The circular says equity derivatives. Technically it means all stocks and indices. However it might not be feasible to do all stocks for 14 hours plus with sustained volumes. So my guess is it is going to be indices ONLY to begin with. But honestly my guess is as good as your guess :slight_smile:


#46

As far as i know , option traders sell high IV and buy low IV , tone of your writing is that , option sellers benefit low IV , but how ? and also If SEBI makes option style in to American ,Option sellers will be in a fix!! :disappointed_relieved:


#47

Hi @TIMEFRAME

That’s a clever question. Glad you asked.

So I’ll qualify that statement. For institutions who sell with continuous Delta hedging, it’s much better that the gaps are lower. They can manage continuous moves very well, and they’ll really love to take this no gaps scenario over the uncertain gap scenario where they could be wrong once in a while and lose quite a bit. This is of course assuming that they do not know what is going to happen, and there is no insider in information.

Large players like taking lower risks which they can manage with consistent smaller returns over large uncertain gambles which they have no control over. Of course the players love large gaps when they buy options though.

To quote a fellow trader, “itna risk lo ki paise chap jaaye. Lekin itna mat lo ki job chalee jaaye.”

So selling options with continuous Delta hedging gives a better risk reward profile despite the lower reward, so the institutions must be happy. I can personally vouch for how much we hated gaps when I sold options for a couple of banks.

But, if you are an option seller who doesn’t Delta hedge continuously, this is indeed bad news for you.

I’ll be writing a post explaining this on the sensibull blog on Wednesday. Please do read if you have the time!


#48

Thank you , Oh! yes i will wait & i will have time :slightly_smiling_face:

:smiley: thats true " " sahi baat hai"


#49

Simple n precise thoughts out of the effect on Options by extension of trading hours from Shubham Agarwal, CEO of Quantsapp.


#50

Hi abid, might be curious to understand how this will happen… My eg. Let’s say icicibank is trading at 282 spot price at cash close of d day I.e at 3:30 pm. Results r out after mkt hrs and say they r bad / good enough to make futures react and they close at 11:55 at say 5% up/down depending on how d results r. Now next day morning at open, won’t d spot price gap up/down by around 5% to align d futures…

Secondly… Also as futures has already made its move previous day, it wud b just a dud while cash reacts…??? How is this as per definition of derivative whose price depends on underlying / spot… Kindly enlighten


#51

Hey @VIPULK thanks for asking this. I missed a very important point because of context. The point is simple. In an institutional deriv trading setup, no one cares about the cash/ stock equity price. No one trades it either. It is always futures.

When I meant underlying I meant the futures, not the spot/ cash / stock. Everything happens in futures. Even delta hedging is done with futures. Also contrary to what goes around in many circles, no one in institutional prices options off the spot, everyone prices options with futures as the underlying.

And now that we are here, here is a little trick. When you try to price an option off a Black Scholes Calculator, you can actually price it way cleaner using a future. Just use Future price as S (which is stock price) and set r (risk free rate) and d(dividend yield) equal to 0


#52

Hi @TIMEFRAME

Here is the link to that one. Thought I will release it early


#53

Thank you @Abid_Hassan Your write ups are informative ,
After approving extension of trading hours , SEBI pushed Stock Exchanges and market participants, in to a catch 22 situation. now the Exchanges has to decide.
My assumptions on extended trading hours is that

  1. If only Index futures and in case only stock derivatives are also allowed to trade till midnight !! future traders react according to EU & USA market events , probably near last hour trading , future traders try to keep future price near the spot price which is already closed , next day spot indexes/ cash market react according to the overnight events. in other words volatility / gap up / gap down will be more frequent , probably gap up/down will be a every day phenomena.

  2. If exchanges extends trading hours for whole market ( cash + derivative segments) , which is impracticable , will be a field day for Fund managers , we will have their extended interviews on Business news channels , like never ending : saas bahu " operas :smiley:.
    so market volatility come down , on net ,net at the end option writers will be in a fix. .


#54

Hey @TIMEFRAME
We will soon find out point 1

And total lol at the saas bahu :smiley:


#55

There was news recently that SEBI would extend trading hours of equity derivatives from October.

Does that include nifty/bnf derivatives as well? What about equity only?


#56

Check this response


#57

Thanks Bhuvanesh. That was helpful. When saying volatility will decrease, this includes day high and low as well, right?

Does this mean we might have to put smaller targets and SL than what we have been doing so far?


#58

#59

Splitting into 2 sessions could be confusing for traders. What OHLC prices will the Bhav copy for a particular date show? The prices of the first session or second session? Or combined over the day?

And will the Stop Loss orders get carried forward to the second session? Or do we have to place them again in the middle of the day?


#60

will it affect the equity cash market


#61

Is there any way to stop this !!

the bid ask spread is just going to increase, since people are going to trade when ever they like and not during a fixed time.

Why aren’t brokers protesting this move. All the subbrokers are going to lose their clients only big brokers would have a edge, stifling competition.


#62

Nobody can stop SEBI , to stop extended trading hours , Exchanges & Brokers are on SEBI side , only hope for crazy SEBI is that , trading can be " straight away jump to ’ "second session " :grinning::grinning: so that SEBI can make happy FII’s ( who are trying to get out of India )