The curious case of not having an expiry for the NiftyIT index
We all know there are 4 Nifty indices that have weekly expiries.
- Nifty50
- BankNifty
- FinNifty
- MidCpSelect Nifty
This article aims to discover why we do not have the NiftyIT in the futures and options segment when a lower-tier MidCpSelect index is available. Also, compare it with the highest speculated index i.e. BankNifty and outline the demerits of exclusion.
There are 12 companies in BankNifty Index out of which the top 6 of them are part of the Nifty50 index. The total market cap of BankNifty is 34.89 lakh crore. The Mcap of the 6 banks which are in Nifty50 is 31.15 lakh crore.
There are 10 companies in the NiftyIT index out of which 6 of them are part of the Nifty50 index. The total Mcap of the NiftyIT index is 28.93 lakh crore and the Mcap of those 6 firms which are part of Nifty50 is 27.23 lakh crore.
The Mcap of all the 25 firms in the Midcap select index is only 12.23 lakh crore. Notice that the sum of Mcap is much lower than TCS which is part of the NiftyIT index and just above HDFCBANK which is part of BankNifty. Also, none of these firms are part of the Nifty50 index.
BankNifty usually attracts the highest volume and count of options traders because of its premium over Nifty50. Also, BankNifty has a higher beta than Nifty, which means the swings will be wilder and the volatility higher. When the volatility goes up — the options premium also goes up thereby attracting more sellers into the market.
People started realizing the power of BankNifty only when its expiry got decoupled with Nifty50 and moved to Wednesdays. Professional traders prefer to play BankNifty as its bang for the buck is on the higher side i.e. you get more premium per the margin blocked. But from Jan 2023, I noticed the premiums dropping & the premium/margin blocked ratio collapsing.
Meanwhile, NSE announced 2 to 3 changes on expiries.
- MidCP Select Index was introduced and it expired on Wednesdays. Later it was switched to Mondays
- BankNifty Expiry moved to Fridays and then revised it to Wednesdays.
- LTI Mindtree got added to the Nifty50 index as HDFC-HDFCBK merged
If BankNifty and NiftyIT have six companies each that are part of Nifty50 and the total Mcap each are 31.15 and 27.23 respectively (very low variance). Why is NiftyIT index not added to the futures and options segment?
What merit does it give to include Midcap select index which is 2.3 times smaller than NiftyIT into FnO? Also, the firms that are part of Midcap Select are not bundled together as per any theme or structure. It looks like those firms are selected and added just for namesake. I personally have no objection to having another index, but when a deserving index like NiftyIT is excluded — it makes no sense.
NiftyIT is the future of the Indian business landscape. More and more firms are pivoting to technology and tech-related sectors. Just compare it with the NASDAQ 100 of US (collection of non-financial companies). Just look at the weightage reduction of Financials:Technology in the past 5 to 6 years i.e BankNifty:NiftyIT. Also, look at the new IPO listings — more technology-dependent firms are getting listed compared to financial services peers. NiftyIT may get transformed to the NASDAQ of India over the next 10 years.
Let us also analyze from the charts’ perspective.
Chart1: BankNifty’s ATR (average true range) is slowly stabilizing. Currently, it has a value of 441.17 when the spot is at 44287.95 i.e 0.99% intraday swing expectation
Chart2: NiftyIT has an ATR of 450.48 when the spot is at 31723 indicating an intraday swing of 1.4%
NiftyIT being more volatile will attract higher options premiums compared to BankNifty. If the futures and options are enabled, it will pull more speculators, hedging firms, and traders into the arena. Since the results from the IT majors like TCS, INFY, WIPRO and HCL usually create wild swings — the NiftyIT futures could be an excellent hedging tool against the equity positions as well.
I personally feel the options volume will surpass the MidCPSelect index in just 3 to 4 expiry sessions. I hope this article reaches the think-tank desk of NSE and an appropriate deliberation is instructed.
If NSE fails to act, BSE could front-run and enable FnO for their BSE Information Technology with expiries on Mondays and see the change.