Tuesday, March 12, 2013


If you thought Monday’s FII action in derivatives was eye popping, Tuesday would make you fall off the chair. While on Monday, FIIs net bought Rs 2,200 cr worth Index options (mainly Nifty) with Open Interest  going up by 73 lakh shares; On Tuesday both these numbers almost doubled with net buying of Rs 4,000 cr along with an addition of a massive 1.5 crore shares in Open Interest

What really stands out on both days is the massive Open Interest build-up at deep out of the money strikes. For example, in Tuesday’s trade, 5600 Put added 26 lakh shares while 5500 Put added nearly 15 lakh shares. For an index, which is trading above 5900, we are talking about strikes which are a good 5-7% off current levels with a relatively short series (only 11 days left in current series)

Tuesday also stood out in terms of futures data from FIIs, with a net selling of nearly Rs 500 cr and an Open Interest build-up of nearly 6 lakh shares. For the first time since budget, we have seen short positions in Nifty.

Now, what does this data mean? Well it could mean 2 things – first, some FIIs are buying in cash markets but given last month’s experience, they want to be completely hedged. And second, some FIIs have taken directional call on the Nifty with a view that the short covering bounce is mostly done with and an inherently weak market would now complete its logical move towards the 200 day moving average. If it’s the first case, that’s as healthy as it can get for the market since over-hedged markets would normally inch higher. But if the second scenario plays out, it may actually make February look relatively better.

What was also interesting on Tuesday was the sharp intra-day recovery between 1:30 to 2:30 and an equally sharp drop again between 2:30-3:30. There is an old saying “Amateurs open the market and professional close it”. Normally if a market closes near day’s low, it tells you that professional traders are happy keeping their shorts overnight. What was also interesting was that the last hour selling was not accompanied by added weakness in global markets. In fact, European markets had turned in the green.

Keep in mind the market had a crunching 7% fall from its February high of 6110 to the budget day low of 5670. That’s a total of 440 points. At Monday’s high of 5970, it had reclaimed 300 points out of that. We all know that bear market rallies are sharp and at times give an impression that a new bull market has started. But until the Nifty crosses 6,000 and makes a move towards previous peak, this just remains a sharp pullback in a structurally weak market. One thing is certain; the screen is not looking comfortable, especially for the high beta midcaps and to me last week remains a sucker’s rally. I would be happy to change my view if the Nifty rallies this week.

Disclaimer: I reserve the right to be wrong. If I was always right about stock markets, I would own some island in Caribbean.


  1. One thing is for sure from ur analysis, market is nt going to expire near the current levels and wd b very volatile, given tht vix is very low one should buy both near out of the money call and put, may b 6000 call and 5900 put on Friday evening if 5900 and 6000 levels are not breached till then

  2. Yeah Pallav. That could be a good strategy.

  3. Dada:

    Very well written and cogently argued piece; however, I am still optimistic that market will rally and we would get past 5970 - 6020 supply zone.

    Best regards.


  4. welcome back to CNBC.... missed your research big time...