Short-sellers on Dalal Street were caught on the wrong foot on Wednesday. Even as the sharp rise in stock prices was cheered by investors, this breed of traders had to cut their positions amid heavy losses.
The Bombay Stock Exchange benchmark Sensex gained 433 points or 2.71 per cent and S&P CNX Nifty index of the National Stock Exchange rose from near-4,800 to touch the 5,000 mark on Wednesday.
This was widely unexpected, given the state of excess pessimism due to worsening of the Euro zone crisis and no positive triggers from the domestic economy.
“Cell phones of traders were buzzing for requirement of additional margin money as soon as the Nifty index rose above 4,970. It was a crucial level.
| CRASH IN NIFTY OPTION PREMIA |
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On Thursday, too, if the markets cross 5,150, it would trigger another massive round of short covering. Then, markets would rise above the 200-day moving average and another crucial level,” said Ajay Pandey, assistant vice-president, institutional sales, at Intime Spectrum Securities.
Already, rules regarding margin requirements have been made strict due to high volatility. Many brokers collect 40-50 per cent margin from traders instead of 20-25 per cent earlier. “Short-selling has been in vogue and traders were making easy money for many sessions now. However, Wednesday’s market rise will change the game in the futures and options segment,” said Kishor Ostwal, managing director of CNI Global Research.
Short-selling refers to selling assets, usually securities borrowed from a third party, with the intention of buying these back later at a lower price. The short-seller hopes to profit from a decline in the price of the assets between the sale and the repurchase. Short-selling has been in vogue recently as volumes are significantly low in the market and every positive news, like the sharp fall in global crude oil prices below $100 per barrel, were discounted in the past few sessions.
A 40-50 per cent crash in premia of ‘put’ option of Nifty is a clear indication of traders’ desperation to cover short positions. The 4,800 ‘put’ premia of Nifty, which was at Rs 85 to the underlying price, fell to Rs 54 at close of market.
Similarly, the premia of 4,900 Nifty put fell from Rs 130 to Rs 82 at closing. Put premia for 4,500 Nifty fell from Rs 22 to Rs 12. The 4,600 and 4,700 level Nifty index put premia too, crashed by 50 per cent. Buying a ‘put’ indicates the desire to short the market.
According to stock brokers, there were huge short positions in the market after gross domestic -product (GDP) figures were released and nobody had expected that markets could witness such a sharp upmove. India’s GDP fell to 5.3 per cent, the lowest in nine years.
Also, there has been no respite for the currency and foreign institutional investors did not seem to be in a hurry to buy in India.
Among the punters’ favourites, Reliance Industries rose 1.7 per cent, Sterlite Industries was up 4.06 per cent, Tata Motors gained 5.71 per cent, State Bank of India 3.81 per cent and ICICI Bank was up 2.13 per cent. Short-selling has been high in Reliance on excessive negative news surrounding the company and fall of gas output from the KG-D6 basin.
Tata Motors was on punters’ radars for shorting after it posted poor results this quarter and banks stocks has not done well due to an overall weak economic scenario and high interest rates.
Wednesday’s rise was ahead of the European Central Bank’s policy meet, where another stimulus package for the Euro zone and interest rate cut were expected to be announced. Also, the Reserve Bank of India is expected to cut interest rates by at least 25 basis points in the next couple of weeks.