TREND: FIIs enter Dec F&O series with high hopes, but DIIs cautious

Friday, Nov 27, 2020


By Chiranjivi Chakraborty


MUMBAI – After a record-breaking buying spree in the November derivative series, foreign institutional investors have started the new futures and options series with bullishness at a multi-year high. 


The optimism comes in the backdrop of increasing probability of the mass distribution of COVID-19 vaccines in major countries from the March quarter, signs of a sustained recovery in the domestic economy, and hope of a strong rebound in the global economy and corporate earnings in 2021. 


The long-to-short positions ratio, a traditional indicator of sentiment among foreign investors, was at 3.4 times on Thursday – a multi-year high. The cohort has also rolled forward 91% of its bullish bets in the market to the December derivative series as against the three-month average of 69%.


The "overly bullish" sentiment among foreign investors, though, is a cause of concern for domestic investors, as such levels of optimism in the past have been a signal of impending market correction.


At the beginning of the February derivative series in 2018, sentiment among foreign investors was similarly buoyant, only for the Nifty 50 index to lose 687 points that month. 


Overstretched near-term indicators suggest that a mild correction is possible as the Nifty 50 consolidates and digests the gains made in the past two derivative series, with wild intra-day gyrations continuing, Navneet Daga of YES Securities said in a note.


The caginess of domestic traders is perhaps reflected in the positioning in the options contracts of the Nifty 50 index at the beginning of the new derivative series. The highest open interest among put options of the Nifty 50 stood at the 12000 strike price on Thursday, while the highest open positions among call options was at the 13000 strike price.


Brokerage firms noted that the implied volatility in options contracts of the Nifty 50 had declined sharply towards the end of the November derivative series, suggesting traders are bracing for some consolidation. 


Domestic institutional investors, retail investors and proprietary traders rolled over 94% of their short positions on the Nifty 50 index to the December derivative series as against merely 50% by foreign investors.


Overall, traders rolled over 79% of their positions on the Nifty 50 futures to the December series as against a three-month average of 77%. Similarly, market-wide rollovers stood at 93% at the end of the November derivative series, compared with the three-month average of 91%.


From the perspective of domestic traders, the gains in the market may lie in individual sectors and stocks as against in the benchmarks. Derivative analysts said the rollover of bullish positions in single-stock futures was high among high net worth individuals.


Overall, futures of single stocks saw 93% of positions being rolled over to the December derivative series, in line with the three-month average.


The bias among domestic traders for single-stock futures reflected the prevalent view that mid-cap stocks could continue to outperform their large-cap peers as the outlook for the economy improves.


Defensive sectors like pharmaceuticals, information technology, and telecom–underperformers in the November series–saw a higher rollover of positions than in the previous series, suggesting that these sectors could outperform in the December derivative series.  End


Edited by Mainak Moitra


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