Proprietary traders win this round in the derivatives game
To the humble retail investor, the term FII conjures up images of dapper traders operating out of swanky offices across New York, London and Hong Kong.
By Ram Sahgal, ET Bureau | Updated:
MUMBAI:To the humble retail investor, the term FII conjures up images of dapper traders operating out of swanky offices across New York, London and Hong Kong. However, there’s a breed of lesser known, low-profile traders classified as “proprietary” by the exchanges who have bettered even the suave FII at the futures and options game in recent works. A proprietary, or prop, trader, cuts trades for itself – not for clients. Many stock brokers who also trade on behalf of clients run prop books but trade through other brokers to avoid “conflict of interest”. Prop traders mint money towards the end of each month, especially during times when volatility spikes.
The Nifty shed 216 points or almost three percent in the past three days through Wednesday.
During this time prop traders who punted on the Nifty, Bank Nifty and stock options and futures have made a killing, probably surpassing even the FIIs who use the derivatives segment to hedge and to punt. “Prop traders probably outdo even FIIs at trading derivatives,” said UR Bhat, MD, Dalton Capital who’s also a veteran on providing advisory to foreign investors. “Their superior performance stems from better information flows.” A day before Wednesday, when Nifty fell by 1.3%, prop traders were net sellers on an outstanding basis of both index (primarily Nifty) call and put options. They were also cumulatively short index (again Nifty) futures and were net sellers of stock call options.
When the Nifty falls a seller of index or stock calls rakes it in because he gets to pocket a large part of the option price or premium paid by the buyer, who makes a loss.
Since the market fell, the value of the puts sold by prop traders would have risen, subjecting them to losses. But, the traders spared themselves from this by selling deep out-of-the money puts, which close to expiry, lost value because of a rise in time decay – something that causes an option price to rapidly fall even when an underlier falls in the last week of expiry.
The Nifty shed 216 points or almost three percent in the past three days through Wednesday.
During this time prop traders who punted on the Nifty, Bank Nifty and stock options and futures have made a killing, probably surpassing even the FIIs who use the derivatives segment to hedge and to punt. “Prop traders probably outdo even FIIs at trading derivatives,” said UR Bhat, MD, Dalton Capital who’s also a veteran on providing advisory to foreign investors. “Their superior performance stems from better information flows.” A day before Wednesday, when Nifty fell by 1.3%, prop traders were net sellers on an outstanding basis of both index (primarily Nifty) call and put options. They were also cumulatively short index (again Nifty) futures and were net sellers of stock call options.
When the Nifty falls a seller of index or stock calls rakes it in because he gets to pocket a large part of the option price or premium paid by the buyer, who makes a loss.
Since the market fell, the value of the puts sold by prop traders would have risen, subjecting them to losses. But, the traders spared themselves from this by selling deep out-of-the money puts, which close to expiry, lost value because of a rise in time decay – something that causes an option price to rapidly fall even when an underlier falls in the last week of expiry.
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