Behavioural Impact of Traders in the Indian Option Market

The behaviour of traders in the derivative market differs with variations in the quantity of private information, their expectation and the liquidity available. Most academics argue that equity investors are more likely to behave rationally than equity derivatives traders. Since derivatives are new segment of secondary market operation in India, investors need to understand the complexity of this trade. This paper investigates the behaviour of option market trader using a unique and detailed dataset of open interest and volume of CNX Nifty index option listed on the National Stock Exchange from April 2014 to March 2015. Empirical and statistical analyses are conducted to evaluate the movement of open interest and the volume of contracts to determine the rational and irrational behaviour of traders in option market. The analyses documents major stylized facts about the option market activity over these time period and also investigate how their trading changed during the stock market fluctuations. The empirical evidence shows that traders purchases more calls to open brand new positions when the volume of stocks are higher over horizons ranging from one week to two years. Moreover, the least sophisticated group of traders substantially increased their purchases of calls on growth but not value stocks during the stock market volatility during the five year period and none of the investor groups significantly increased their purchases of puts during the volatility period in order to overcome short sales constraints in the stock market.