One Month Into CAS, India’s Options Market Faces a Bigger Question: Is Liquidity Too Concentrated?

A month into India’s new Closing Auction Session (CAS), the debate around the mechanism is beginning to reveal a much larger issue in the derivatives market. The concern is not simply about closing auctions or the popularity of short-dated options. It is about just how concentrated India’s enormous derivatives liquidity has become. 

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Under the CAS framework, continuous trading in eligible cash-market stocks ends at 3:15 pm, followed by a closing auction that runs until 3:35 pm. Equity derivatives continue trading until 3:40 pm. 

The first month has already produced some striking moments. 

On August 13, a Sensex expiry day, SEBI later issued an ex-parte interim order concerning alleged manipulative trades during the auction. Two weeks later, during the August monthly derivatives expiry, the Sensex fell by around 3.3% at one point during CAS. 

August 31 presented a very different picture. An MSCI rebalance brought roughly $4.1 billion of trading into the closing auction, nearly 40 times the average CAS turnover since its launch. Despite the size of the flows, the impact on the broader benchmark remained relatively contained. 

The contrast puts the spotlight on the structure of India’s derivatives market. 

India Has Scale — Much of It Sits in One Corner

India is certainly not short of derivatives activity. 

According to RBI’s Financial Stability Report, using SEBI data, the country’s notional derivatives-to-cash turnover ratio reached 405 times in FY24, compared with 269 times a year earlier and 98 times in FY22. Following regulatory changes, estimates placed the ratio at around 300 times by February 2025. 

Notional turnover, however, can overstate the actual capital changing hands in options. On a premium basis, the RBI put the derivatives premium-to-cash ratio at 2.24 times in FY24. 

The bigger issue is where all this activity is concentrated. 

As of March 2026, NSE offered stock derivatives on 213 securities. Yet Nifty 50 options alone accounted for 91% of NSE index-options premium turnover. SEBI also found that more than three-fourths of index-options turnover in FY26 occurred on or close to expiry. 

That leaves India with a derivatives market that is exceptionally deep, but heavily concentrated around short-dated index options. 

Short-Dated Options Aren’t Necessarily the Problem 

The popularity of zero-days-to-expiry, or 0DTE, options is not unique to India. 

In the US, SPX 0DTE options averaged approximately 2.3 million contracts a day in 2025, accounting for 59% of SPX options trading. 

The broader US options ecosystem, however, is far more diverse. Around 61 million listed options contracts trade on an average day, with listed options available on roughly 4,400 stocks and ETFs. Investors can also access products ranging from single-stock and ETF options to sector products, VIX futures and options, long-dated LEAPS and customised FLEX contracts. 

India’s short-dated Nifty and Sensex options have attracted traders through liquidity, tight spreads, frequent expirations and direct index exposure. The challenge is not necessarily to diminish these products, but to develop comparable liquidity elsewhere. 

Why CAS Has Brought the Issue Into Focus 

CAS determines the official closing price. On a normal trading day, that price plays a role in areas such as valuation, benchmark tracking and institutional execution. 

On a derivatives expiry day, however, the closing price can also determine the settlement value of substantial derivatives positions. 

That creates an unusual interaction. India has deep liquidity in short-dated index derivatives, while the cash-market auction determining the closing price can be considerably thinner than the derivatives positions linked to that price. 

When natural liquidity enters the auction in size, the mechanism can absorb large flows—as August 31 demonstrated. 

Expiry days can look different because there may be significant economic interest in where an index settles without an equivalent level of natural cash-market trading interest across its constituents during the auction. 

The resulting issue is a potential mismatch between derivatives liquidity and underlying cash-market liquidity. 

Simply Launching More Contracts May Not Be Enough 

India has attempted to broaden its derivatives ecosystem before. 

India VIX futures were launched in 2014 but discontinued in 2017 after failing to develop sufficient liquidity. Other products have also existed without attracting meaningful order books. 

Short-dated index options followed a different trajectory. As more traders participated, spreads narrowed, liquidity improved and that liquidity attracted still more participants. 

Replicating that effect elsewhere is more difficult. 

A newly listed contract without consistent two-way quotes can suffer from wide spreads. Those spreads discourage participation, while low trading volumes can, in turn, discourage market makers. 

Liquidity enhancement schemes already permitted in India could potentially play a larger role in selected derivatives products, with market makers rewarded for maintaining two-sided quotes, minimum quantities, reasonable spreads and continuity across strikes and maturities. 

Where Could India’s Derivatives Market Expand? 

Longer-dated options are one possible area. Liquidity becomes considerably thinner for traders looking for six-month or one-year optionality compared with contracts approaching expiry. 

Single-stock derivatives offer another avenue. While derivatives are already available on more than 200 stocks, liquidity could deepen beyond the most actively traded names. 

Sector products covering areas such as banking, IT, pharmaceuticals, energy and consumption could also provide additional avenues for hedging. 

Volatility products are another possibility. India VIX derivatives failed to gain traction during their earlier run, while US VIX options now trade close to one million contracts per day. 

The question, therefore, is not simply which contracts can be listed, but how contract design, market-making commitments and institutional participation can help create sustainable liquidity. 

Investor Losses Remain an Important Part of the Debate 

Any push to deepen the derivatives market also sits alongside investor-protection concerns. 

SEBI’s latest research found that 87.7% of individual equity derivatives traders lost money in FY26, with their aggregate losses reaching approximately ₹91,685 crore. 

Measures including larger contract sizes, fewer weekly expiries and tighter monitoring have emerged against this backdrop. 

But the experience of CAS so far also raises a broader market-development question. India has already demonstrated that it can create exceptionally liquid derivatives products. The next challenge is whether that liquidity can be spread across more maturities, underlying securities, sectors and types of risk. 

One month into CAS, the mechanism has therefore highlighted something beyond the closing auction itself: the extraordinary success of India’s short-dated index-options market has also made its concentration increasingly important to the functioning of the wider market. 

The next phase may be less about creating more derivatives activity and more about giving that activity more places to go.