Record call options selling may fuel market to new high

PALAK SHAH Mumbai | Updated on July 21, 2021

Traders sold call options worth ₹1.36-lakh crore on Tuesday

The selling of call options has reached a fever pitch hitting a new record this week, indicating low possibility of a sharp market crash. The pace of trading in index options is seen as a barometer of stock market sentiment.

The Nifty index, India’s key equity benchmark, is down only 2 per cent from its lifetime high, but stock market data show that at the net level (net of options buying and selling), traders have sold call options worth nearly ₹1.36-lakh crore on Tuesday. A similar high was last seen before the 2019 general elections.

Bearish sentiment

Market experts say this indicates an extreme bearish sentiment and, hence, the Nifty index could reverse and move towards a new lifetime high in the coming weeks/months. In the event of extreme bearish or bullish bets, markets move in the opposite direction.

“Such selling of call options has not been seen in more than two years. There is too much fear in the markets and, hence, traders are offloading their bullish bets. The premium for Nifty index has taken a beating and such high levels of speculation indicate negative sentiment at their extreme. It is a thumb rule of trading that when negative sentiment peak, markets start moving upwards. If the call selling continues till the July month derivative expiry, there could well be a short-squeeze,” said Rohit Srivastava, Derivative Analyst and Chief Strategist, IndiaCharts.

Due to this selling of call options, the premium for Nifty index options at various strike prices has come down by 20 per cent to 50 per cent. Simply put, those who were holding a bullish position at a higher price have cut it down and sold their contracts. At a gross level, the outstanding call options stood at ₹3.76-lakh crore.

“The data suggest that markets are oversold. Call selling happens in panic and derivative traders are fearful. Corporate earnings are intact. Also, cash markets are singing a different tune than derivatives and showing strength and resilience,” said Kishor Ostwal, MD, CNI Global Research.

Speculative bets

Data also show that speculative bets by retail investors and their involvement in trading the risky index options are at a record. BusinessLine had reported in May that the number of traders buying/selling options has gone up 51 per cent in the index segment and 26 per cent in stocks since June 2020.

In the past few months, domestic traders have driven up the options premium with their buying spree, taking the markets higher. This week’s fall in the markets was mainly in line with the global fall that spooked investors and led them to offload speculative positions first.


The Dow Jones Industrial Average, S&P 500 and Nasdaq in the US declined by over 2 per cent on Monday. European markets, too, fell to the same extent. But on Wednesday, when markets in India were shut, global bourses were up more than 1 per cent. If the global markets remain stable, the selling by domestic investors could ebb, brokers said.

Between April and July, foreign portfolio investors sold stocks worth nearly ₹30,000 crore in the cash segment. But while the domestic traders are relentlessly offloading their bullish bets, FPIs are buying options at lower premiums, brokers say.

Published on July 21, 2021

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