Economy

Nifty F&O positions signal markets could rally on short-covering

PALAK SHAH Mumbai | Updated on April 15, 2018

A key derivative signal in the eternal war between bulls and bears points to an imminent sharp rise in the stock market on the back of a massive short-covering rally.

The net open interest (OI) for Nifty ‘put’ contracts crossed ₹40,000 crore on April 11. This has happened only four times in the past 20 years and each time, the Nifty index rallied between 6 per cent and 13 per cent in that particular month, data show.

Buying index ‘call’ options means going long on the markets; purchasing ‘put’ options implies that traders are going short anticipating a fall. The net Nifty ‘put’ OI, which is the long minus the short position, stood at around ₹44,000 crore for the market closing as on Friday. This apart, the net short position in Nifty futures contracts stood at around 1,20,000 contracts last week, indicating a near-record build-up of short positions in the market.

 

 

“Such a huge build-up of short positions in the Nifty futures and options segment by both foreign portfolio investors (FPIs) and domestic traders implies there could be a massive short-covering rally before the April series derivative contracts expire,” said Rohit Srivastava, fund manager, Sharekhan-BNP Paribas. “The negative sentiment in April calls for a contrarian bet on the market.”

On April 5, BusinessLine had reported that FPIs had been caught on the wrong foot as they were 1,34,006 contracts short in Nifty index, the highest in five years, and that a short squeeze could restrict a fall. The Nifty index closed positive on all seven sessions between April 5 and 15.

Short-covering by FPIs has kept the market buoyant despite grim news of a global trade war, rising crude oil prices and tensions over Syria. The short-covering could be even more intense in the coming weeks as FPIs and domestic trades come out of their selling position in both futures and options. Even if there is a fall, it could be restricted to a few points in the key indices, experts say. The Nifty index, which closed at 10,480 on Friday, is already up nearly 4.5 per cent in April from the lows it had touched in March.

Published on April 15, 2018

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