FPIs buy more index put options, expect market to fall further

MUMBAI: Markets may have fallen in the last nine trading sessions through Monday, but for retail investors the time might not be ripe yet to bargain hunt, if bearish bets being modified by the big boys of the market – foreign portfolio investors (FPIs) – are any indication.

From April 15 to April 27, FPIs have purchased more index put options – a bet that the market will fall. They have simultaneously cut purchases of long index futures which are bets that the market would rise. During this period they net sold equities worth Rs 5,819 crore which led to the market (Nifty) correcting 7.2% to 8,213.

It was a period when implied volatility (IV) – or, traders’ perception of risk – rose 28.2% to 18.74. IVs rise when a market falls.

“The undertone may not be bearish, but don’t bargain hunt just yet,” said Bhavin Desai, derivatives analyst at Motilal Oswal Financial Services, indicating the fall might prolong a while longer. From the beginning of this year to April 13, ETIG data culled from NSE shows that FIIs on average were positive on the market but the situation changed after that. From April 15 to April 27, excluding the one-off Rs 16,358 crore of net purchases when Daiichi exited Sun Pharma, FIIs have net sold Rs 5,819 crore worth of shares.

Till April 13, FIIs bought put options to hedge their bullish positions in the cash and derivatives market. But after that, they began to purchase more of such options on fears the market fall would erode their portfolio values. Over the same period, they modified their derivatives bets significantly.