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As coronavirus spreads, so do fears; Nifty may break below 11,682

For investors and traders, the option in a falling market is to buy out of the money index puts.

, ET Bureau|
Last Updated: Feb 25, 2020, 08.27 AM IST
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Some analysts expect the fall to be deeper than just 1.2 per cent to the 200-day SMA if the impact of Corona virus worsens.
The Nifty could soon test the 200-day simple moving average of 11,682.8, with the major support of 12,000 being breached Monday on FII selling across cash and derivatives markets. The FII reaction underscored the panic in global markets about the rapidly spreading corona virus from China to other parts of the world.

Derivatives analysts cited the overnight build-up in open interest (OI) of the February 27 expiry 11,700 put on Thursday — close to expiry — for their forecast of markets testing the 200-day SMA of 11,682.8. That strike saw OI jump to 19.78 lakh shares (75 shares make a lot) Thursday from 15.49 lakh shares a day earlier. Such a rise in OI close to expiry is seen by analysts as negative for markets.

“Strong hands purchased 11,700 strike puts on Thursday when the market was at 12,080,” said Amit Gupta, derivatives head, ICICI Securities. “This strike is just above the 200-day SMA and its purchase close to monthly derivatives expiry indicates the increasing chances of the market testing that level.”

Indeed, the price of this put has risen 6 times from last Wednesday to a provisional Rs 42 a share this Monday along with a spike in OI to 27.82 lakh shares from 15.49 lakh shares over the same period. It hints at buying by institutions, like FIIs, either as a hedge to their portfolios or simply as a bet on markets falling and their gaining by a rise in the put price.

Nifty snip 12

Some analysts expect the fall to be deeper than just 1.2 per cent to the 200-day SMA if the impact of Corona virus worsens. FIIs net sold shares worth a provisional Rs 1,161 crore and index futures — Nifty and Bank Nifty — worth Rs 1,238 crore apart from net purchasing more index puts, which caused the Nifty to fall 2 per cent to 11,829.4 on Monday.

On Monday, they were cumulatively net short index futures by 1,07,773 contracts, up from 95,873 contracts last Thursday. The number of index puts they cumulatively bought stood at 2,23,628 contracts, up from 2,04,073 contracts, which caused fear gauge India Vix to spike 24 per cent to 16.99.

For investors and traders, the option in a falling market is to buy out of the money index puts.

“The pace of the decline indicates that markets could even breach the 200-day SMA,” said Rajesh Palviya, derivatives head at Axis Securities. “Under such circumstances, buying out of the money index puts is an option.”

The active Nifty futures contract witnessed some long liquidation as the market fell. The extent of the bearishness on the index was evident in the near month index put call ratio dropping to 0.75 Monday from 1.01on Thursday. This showed that prop traders have cumulatively sold huge number of calls prior to expiry as they don’t expect the market to rise. The buyers of these calls are FIIs, who are short index futures and long index puts, and rich clients.

The range of the market is 11,800-12,000 for now in the current month, options data indicate. But odds of the index breaking the 11,800 have shortened.

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