Mumbai: A key indicator shows that market sentiment might not be as emphatically bullish as appears. The net market wide options open interest (OI) hit a record high of Rs 51,925 crore on Thursday, according to leading brokerage Sharekhan by BNP Paribas. On at least two occasions in the past, when this figure rose as substantially, the market topped out shortly afterwards and corrected by 9-11 per cent.
The number shows that traders are holding a higher proportion of outstanding (open) puts than call options by value. Since for every buyer there is a seller, or vice versa, the number could be viewed as a bullish or bearish indicator depending on whose take is being considered.
For instance, a put buyer expects an underlying stock or index to correct, but a put seller sells as he feels that the odds of a rise outweigh that of a fall and so he can pocket the premium paid by the buyer. However, past trends show that markets have topped out shortly after the net value soared as it did on Thursday.
Rohit Srivastava, fund manager – PMS, Sharekhan by BNP Paribas, cites the almost 11 per cent Nifty correction from January 29 through March 23 this year as having occurred after the net difference of market-wide outstanding options hit Rs 51,790 crore on January 23 . That was just two sessions before the market corrected from the then high of 11,171.55 on January 29 through 9,951.9 on March 23.
The same occurrence, although with a slightly greater lag, happened after the number hit Rs 40,002 crore on September 28 2010. On that date the index closed at 6,029.5 and rose to top 6,284.10 eleven sessions later, on October 14. From there, it corrected to 5,690 on November 26, down 9.4 per cent.
Interestingly, the Nifty made a record high of 11,495.2 on Thursday itself when the net reading hit Rs 51,925 crore. On Friday, the index closed at 11,429.5. Nifty August options show maximum resistance by open interest at 11,500. Maximum support kicks in at 11,000, though 11,200 also offers strong support.
For this month, at least, the maximum support falls 4 per cent below the record high tested on Thursday. “The number of puts purchased and outstanding show that many are buying insurance against a possible fall,” said Rajesh Palviya, derivatives head at Axis Securities. “With the results season more or less behind us, we will be coupled again to international markets which have shown stress signs of late due to concerns over the fallouts from a tariff war and the slump in Turkish lira on European banks.”