In a recent LinkedIn post, Nithin Kamath discusses a significant structural shift in the Nifty options market, arguing that hedging has become considerably more difficult due to the proliferation of short-dated expiries. Kamath, the founder of Zerodha, highlighted how the market’s focus has moved from longer-term hedging to short-term speculation, posing challenges for serious investors seeking to manage risk effectively.
The Rise of Short-Term Options and Its Impact on Hedging
Kamath points to a dramatic increase in the open interest (OI) for options with maturities of 7 days or less. He contrasts the market landscape of 2015 with the present, noting a substantial change in the distribution of OI. “In 2015 (Graph 1), the 0–7 day bucket was 18.8% of index OI. Today it’s 60.4%,” Kamath wrote, illustrating the shift. This concentration in short-dated contracts means that liquidity has dried up at the longer end of the options chain, making it harder to purchase meaningful insurance precisely when market volatility spikes, such as during geopolitical events like the Iran-Israel-US conflict.
“The market has structurally shifted from hedging to speculation. Liquidity has exploded, which is good. But genuine hedging has gotten harder because liquidity has dried up at the longer end.”
The volume data further underscores this trend. Kamath shared that total index options contracts surged from 564 million per quarter in 2015 to a peak of 34.9 billion in Q3 2024. He attributes this 62-fold increase almost entirely to the sub-7-day bucket, indicating a massive influx of speculative trading activity.
The Problem with Lopsided Market Structure
According to Nithin Kamath, this lopsided OI structure presents a fundamental problem for market health. He argues that a robust market should cater to a range of risk horizons, not just the immediate short term. “A healthy market needs to offer solutions across different risk horizons, not just the next seven days,” Kamath stated.
The implications are significant for institutional investors and serious hedgers who rely on longer-dated options to manage their portfolios against significant market downturns. As Kamath explains, the current structure makes it difficult to execute strategies that require buying ‘insurance’ against longer-term risks.
“Serious participants need depth at the 30, 60, and 90-day tenors too.”
Potential Solutions for Rebalancing Hedging Liquidity
In his post, Nithin Kamath also proposed potential solutions to rebalance the market towards more effective hedging. He suggests that targeted policy changes could encourage activity in longer-dated options.
Incentivizing Longer-Dated Contracts
Kamath suggests that reducing certain costs associated with longer-term options could be a viable first step. “Lower STT, lower exchange charges, lower brokerage for positions beyond 30 days is a reasonable start,” he proposed. The idea is to create small price signals that make holding longer-dated contracts more attractive, gradually shifting volume back to the tenors where genuine hedging activities are most effective.
“Small price signals that make longer-dated contracts cheaper to hold should gradually draw volume back toward the tenors where real hedging happens.”
By making these longer-term instruments more cost-effective, Kamath believes the market can restore a healthier balance, enabling participants to better manage risk across various timeframes and strengthening the overall utility of the options market for hedging purposes.
📝 About This Content
This article is based on insights shared by Nithin Kamath on LinkedIn.
📅 Originally posted on March 11, 2026 | View original post on LinkedIn →