After touching a 15-month low of 3790, the Nifty made a dramaticturnaround and ended within sniffing distance of 4200.
Foreign institutional investors (FIIs) and derivatives traders covered their short positions in Nifty and stock futures in the later part of the week.
The FIIs were net buyers of 100,000 (5 million shares) index futures contracts and 31,200 stock futures contracts on July 18. Their weekly open positions in index and stock futures declined by 70,000 contracts and 32,000 contracts respectively, indicating covering of short positions. Options contracts, particularly the 3700-4000 puts and 4000-4200 calls, witnessed short-covering during the week.
The writers (basically sellers) of 3700-4000 puts covered their positions when the Nifty traded above 4000, while the call writers covered their 4000-4200 positions when the Nifty quoted around 3800.
The covering of positions in out-of-the-money contracts involve the payment of lower premium compared to in-the-money and at-the-money positions.
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In out-of-the-money call options, the strike prices are above the underlying value, whereas the strike prices of in-the-money contracts are below the underlying value. The converse is true for put options.
The open interest at the above strike prices accounted for 71 per cent (Rs 19,500 crore) of the total Nifty options open interest.