Thursday set for big move as option traders pile up huge bets
Mumbai: Market sentiment turned extremely bearish, coinciding with US Fed policy and ahead of the weekly Nifty expiry on Thursday, as traders sold a record value of market-wide calls relative to put options. Analysts, however, said a sliver of positive news by Thursday could result in a huge rally, given the massive bearish sentiment.
The value of calls sold exceeded that of puts by a record ₹8.43 trillion on Wednesday, according to IndiaCharts. These include index and stock call and put options on the NSE, the country’s largest stock exchange.
In the past, whenever the value of calls sold has exceeded that of puts sold by a wide margin, markets have made a bottom. For instance, on 4 June, when the Bharatiya Janata Party fell short of a majority on its own, this reading hit ₹5.48 trillion. Markets thereafter rallied 20% from a low of 21884.50 to a record high of 26,277.35 on 27 September on political continuity.
“The reading on Wednesday indicates that we are at a bottom if anecdotal evidence is anything to go by,” said Rohit Srivastava, founder, IndiaCharts.
Call sellers are bearish and expect the markets to correct, allowing them to pocket the premium paid by call buyers, who are bullish. Any positive trigger could result in call sellers closing out their bearish bets by buying the calls they sold at higher levels
Put sellers are bullish and expect the markets to rise and earn the premium paid by put buyers, if that happens. A fall in markets, however, leads the sellers to cover their puts by buying them back at higher premiums, further increasing the losses.
The Nifty had plunged 11.5% from its 27 September record high of 26277.35 to a low of 23263.15 on 21 November on relentless foreign portfolio investor (FPI) selling—of over ₹1 trillion—following weak Q2 earnings and rising US bond yields. It rebounded by almost 7% to 24857.75 by 5 December as FPIs turned net buyers post November. Till December 17, they have net bought equities worth ₹23,504 crore, according to National Securities Depository Ltd.
However, markets have begun to turn wobbly of late, after data Monday showed the trade deficit ballooning to a record high of almost $38 billion in November and with the rupee plunging to a record low of 84.96 to the greenback on Wednesday. The Nifty fell for three straight days by 2.3% to 24,198.85 from Friday’s close of 24768.3.
“The single weekly expiries since this month have proven to be extremely volatile and with the Fed decision and option data looming, Thursday could well turn out to be an action-packed expiry like the previous two,” said Rajesh Palviya, derivatives head at Axis Securities.
On 5 December, the first single option expiry week, Nifty gyrated 562.2 points between the intraday low and high. The Sensex expiry last Friday saw the highest intraday movement of 2,131 points in six months.
The single option expiry a week was rolled out by Sebi on 1 October in light of a study which showed 93% individual traders incurred a loss of ₹1.8 trillion during FY22-24, a large part of which was contributed by index options.
