Siddarth Bhamre: More short covering to lift market higher

It has been a fantastic week; obviously for those who have been long. There has been shift in a lot of things in the market. Be it overall sentiment, outlook on global economy, foreign institutional investors’ (FIIs) trading pattern or the currency movement.

As it was an expiry week, we would first comment on rollovers. Very rarely do you see rollovers of 80% in Nifty and that too with addition of open interest compared to last series. Well, we would like to dwell on this build-up and rollover figure in detail, which will throw more light on who is doing what, and what to expect from markets going ahead.

We have been stating how FII positions have been going down when they started covering their shorts as the market bounced from 4700 to 5100 levels. However, domestic participants continued to hold on to their short positions. During this period, FIIs were active in options and were buying calls.

On expiry day, we saw significant buying by FIIs in index futures and their rollover of index futures was almost 95%, which clearly suggested that they bought around `2,500 crore of index futures in the November series. So with rollover for Nifty being high, it was clear that FIIs have long positions and others short. After Reserve Bank of India’s hike in interest rate and deregulation of savings account rate, we saw huge short positions building up in the banking sector.

During Muhurat trading day and Thursday’s holiday global market reacted to EU development and Friday’s gap-up opening was very much expected. We also expected that there will be huge short covering and market may rally even after 150 points gap-up opening. To our surprise, we have not seen any form of short covering in the index while in stocks a few names did show some short covering but quantum of it is far less than anticipated.
Even if we get flattish global cues and market moves slightly above current levels, the shorts that have not covered their positions in anticipation that market may correct would then start covering their positions, which may take us substantially higher from current levels.

Options data suggests that good buying has been happening in out-of-money call options from 5400 to 5600. Put activity is decent in strikes ranging from 5200 to 5400. Implied volatility has fallen drastically and is now trading at 21.01% level, and we say it is a drastic fall because we are still in an uncertain environment from the medium-term perspective.

Taking all this into consideration, we advise to hold on to long positions if you were long since beginning of the last expiry, and if you have missed out on this bounceback, and we believe such cases will be higher than the former, we advise buying at-the-money calls and trade with positive bias in them.

The writer is head - equity derivatives at Angel Broking