Market may open higher as F&O bears crash out

The Nifty may test 20,500 levels, thanks to short-covering by foreign portfolio investors (FPIs) as well as retail and high net-worth option sellers. Ahead of election results, FPIs held net short futures positions of 47,161 Nifty and Bank Nifty contracts, and net long index put options totalling 240,625 contracts. Analysts expect them to cover at least some of their short futures positions and reduce their puts. Short-covering means buying back contracts sold earlier, which adds to upside momentum.

Besides, retail and so-called high net-worth, or wealthy, investors who have been sellers of Nifty and Bank Nifty call and put options will have to close out their short positions in Nifty and Bank Nifty calls, fuelling the rally further.

The combined value of the 20,300 weekly call and put options—weekly expiry usually happens every Thursday—sold by proprietary traders and high net-worth clients was around ₹233 a share, with 50 shares making one contract. This baked in volatility of 2.3% on the up and downside from 20,300, with the Nifty likely to trade between 20,067 and 20,533 on Monday.

Derivatives heads of research at top broking firms expect that a gap-up opening would be aided by short-covering of futures contracts by FPIs and call sellers who have net sold calls at 20,200 and 20,300 levels, and possibly at the 20,500 level.

The Nifty closed on 1 December at 20,267.90 after touching a fresh high of 20,291.55 , surpassing its previous record of 20,222.45 on 15 September. The Sensex, which is yet to make a fresh high, could do so on Monday, after falling short of its 15 September record of 67,927.23 by just 0.7%, closing at 67,481.19.

“The markets could gap by 100-150 points and will now price in a clear mandate for the BJP at the Centre next year, which will add more steam to the rally,” said Chandan Taparia, head, derivatives and technical research, Motilal Oswal Financial Services Ltd. “While the markets could see fresh institutional and retail buying of CPSEs (central public sector enterprises), the rally to new highs of 20,500 and 20,750 will be aided by short-covering by FPIs and call options sellers.”

NSE data showed that retail and high net-worth clients and proprietary traders were cumulatively net short index options, while FPIs were net long on both calls and puts. While some of these positions are hedges, others were initiated just ahead of the results of state elections.

Clients were cumulatively net short by 19,484 Nifty and Bank Nifty call options contracts on 1 December.

Meanwhile, proprietary traders were net short by 34,964 contracts and FPIs were net long by 54,447 contracts.

Call options buyers buy them on bullish expectations, while put options buyers buy on anticipation of a correction. Both these buy from options sellers in exchange for a premium. If the market rises, calls rise, fetching gains for options buyers and leading to losses for options sellers.

However, call sellers’ losses will be somewhat offset if they have also sold puts. A call seller tends to be bearish while a put seller is bullish.

So far this year, while FPIs have net purchased shares worth ₹1.14 trillion worth of shares, domestic institutions have net bought ₹1.73 trillion of shares.

In addition to the capital market segment, these market participants use the derivatives segment, principally weekly options, to hedge or punt on major events like elections and monetary policy meetings.

Analysts expect market concerns surrounding next year’s general election to abate. However, the market will expect tighter measures on the fiscal front from the government.

“The market will put behind fears of an electoral upset in 2024 with continuity being reinforced,” said Shyam Sekhar, a market veteran and founder of ithought Financial Consulting. “For the public mood to change significantly between now and next year, there has to be a drastic economic or political event, both of which look unlikely. However, the government post the national election will have to tighten its fiscal purse strings, which were loosened due to covid, in order to raise revenue and sustain investment. The market will begin pricing that over the months leading into the elections.”

Rajesh Palviya, senior vice-president (derivatives and technical head), Axis Securities, expects call and futures short-covering to help the Nifty test the 20,500 mark “post a gap-up opening.”