FIIs shifting to options, slash positions in futures

It seems foreign institutional investors are expecting high volatility in the markets, as they have reduced their positions in futures and increased holdings in options.

According to latest data available with the exchanges and SEBI, open interest positions of FIIs currently stand at 3.86 lakh contracts in index futures, which is significantly lower than 5.94 lakh contracts mid-December.

In stock futures, their open interest positions declined to 10.15 lakh contracts from 11.62 lakh contracts on December 17.

On the other hand, open interest in index and stock options surged to 15.86 lakh contracts (5.17 lakh) and 62,215 contracts (48,929) from mid-December level.

For the purpose of comparison, mid-month data can be helpful, as open interest positions remain at the highest point during the middle of every months and decline towards settlement.

Open interest positions refer to the total number of derivative contracts, such as futures and options that have not been settled in the immediately previous time period for a specific underlying security.

FIIs have been unwinding long positions in Nifty since December 2013. According to NSE data, open interests on the long side declined below the 50 per cent mark in overall long positions in the market. Similarly, they have reduced their positions in stock futures but not significantly.

According to analysts, the shift in trading interest by FIIs indicates expectations of wild swings in the market.

“With the Fed sticking to its stand on reducing its monthly stimulus programme, there could be some pressure on the overall inflow. Instead of betting too much on risky assets such as futures, FIIs are opting for options,” said Ramesh Chordia, an independent analyst and sub-broker for a leading brokerage firm.

“During uncertainty, it is better to hedge cash positions in the options segment,” said Arun Kejriwal of KRIS Securities. “They are taking a calculated risk, rather than keeping the positions open in futures,” he said, adding that moving to options makes better financial sense for them as options give higher returns during uncertainty even as the loss is limited. Bank stocks have been under pressure in the past few months. This could have been the result of FIIs unwinding their positions in Bank Nifty, which is a part of the Index Futures, Ramesh said.

The other big factor that could play on investors’ minds is election. “With opinion polls not giving a clear mandate for any dispensation, traders prefer to play safe by opting for the options route,” he added.

COMMENT NOW