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Will the markets tumble in the next few days? That’s the question many on Dalal Street are asking after the 3.5 per cent fall in the Nifty on Tuesday. For those wanting quick answers, a peek into the Nifty options data could throw some insights.
Analysts said the sizable build-up of positions in Nifty’s 5,200 and 5,300 put options of the August series, set to expire on Thursday, has raised the possibilities of a rapid decline in case of another round of sell-off. This is because sellers of the put contracts would be forced to square off their positions if the index dips further.
“There could a sharp fall if Nifty put sellers will cover positions because it takes away a support,” said Ashish Chaturmohta, head-technical and derivatives research, Fortune Equity Brokers.
The Nifty could fall to 5,000 if it falls below 5,180-5,200, he said. The Nifty closed at 5,287.45 on Tuesday.
A put seller is the counterparty for the buyer. He pockets the premium the buyer pays for purchasing the put option. The main difference between a put buyer and seller is the buyer’s losses are limited to the premium he pays, while the seller is susceptible to unlimited losses, in theory.
Total volumes traded on 5,300 and 5,200 put options were the highest across Nifty options contracts as on Tuesday.
Analysts said many traders, who expected the rupee’s decline to stop at 65, had created long positions in Nifty futures and calls in the last couple of trading days. But, they were forced to square off positions on Tuesday after expectations went awry, with the rupee slipping to 66 against the dollar.
Salespeople at institutional derivatives desks said the markets could be under pressure as arbitrageurs unwind positions ahead of the expiry of the August series.
“Many people may square off arbitrage positions and are unlikely to carry forward the positions to the next series (September) because there is no confidence. This will pull down the markets further,” said the head of a derivatives desk at an institutional brokerage.
As the broader market reels under selling pressure, a section of the market is laughing their way to the banks. Proprietary desks of foreign banks and savvy traders, who bet on a rise in implied volatility of options — a measure of the market’s near-term risk expectations — have made a killing in the last couple of weeks. Implied volatility, a key part of options premium pricing, of the Nifty is measured on National Stock Exchange's India Volatility Index (VIX). This measure hit 11.5 per cent to 29.42 earlier on Tuesday, the highest in 21 months.
