Options data points to market bearishness

By: Anand James, GEOJIT BNP PARIBAS

The last month of 2014 had seen both Bank Nifty as well as Nifty Futures falling from record peaks, followed by a recovery rally. With this week’s fall, such recovery attempts have been hammered down, casting doubts on the sustainability of the broad uptrend. FII data shows that they have been net sellers in the index futures segment, while the rest have been buyers in index options.

Stock options give a mixed picture. It suggests that the recent moves are not purely index-driven, warranting a stock specific-approach. Put buying is seen in BHEL, PNB, Tata Motors, Sun Pharma and Tata Steel. Call buying is seen in HUL and Axis Bank, while call writing is seen in ICICI Bank, Coal India, IRB, Reliance Infrastructure and HCL Tech.

Nifty options picture shows the biggest bulge in open interest in 8400 calls and 8000 puts. The choice of these strikes is indicative towards investors’ preference towards strangles as a hedge against volatility, given the 37% rise in VIX, a volatility indicator, this month.

These strikes are also suggestive of the market’s range expectation. It is noteworthy that the increase in 8400 OI has been accompanied by a rise in volume as well price decline, pointing towards an underlying bearishness.

Meanwhile, 7800 put strike has seen addition in open interest possibly pointing at where the bears have set eyes on for now. Nifty open interest put-call ratio has steadily declined from around 1.1 levels towards 0.97 levels from the start of this month, indicating that the activity is more biased towards calls, keeping alive the potential for more falls.