Investors in the domestic equity market are closely watching the July derivatives series expiry set for Thursday. This will be crucial for the stock market for two reasons. One, it comes at a time when the market is trading at a historic high. Two, the market-wide open interest in the derivatives, too, has reached a new peak of around Rs 90,000 crore.
Smart investors like foreign institutional investors (FIIs) have partly hedged their positions at every level by buying equities in the cash market and selling short on the Nifty futures. Nifty July futures closed at 4,545.30 on Friday, with its discount increasing to nearly 21 points, which was previously in a range of 15-18 points to the spot Nifty. The spot Nifty closed at 4,566.05 on Friday.
Sunil Jain, derivatives analyst, Edelweiss Securities, says, ?The discount in Nifty futures is mainly due to the hedge positions created by investors. Throughout the rally, at every level, institutional investors have hedged their positions.?
Experts feel the market will be highly volatile in the coming days until expiry since most of the open interest in the market is on the long side and any negative news at this level may trigger a major unwinding of open long positions, resulting in a drastic fall in the market. Says Jain, ?We have witnessed a one-sided rise in open interest in the market and any trend reversal at this point of time would be very serious in nature.?
Another disturbing sign in the market is that retail investors that had missed the recent rally are rushing in at these levels. Put-writing is seen in Nifty options at every strike, even when the implied volatility (IV) is at 16-18%.
Aggressive put-writing normally happens when the IV is at a very high level clearly, indicating that those writing put at these peaks are not professionals, but retail investors, says a derivatives analyst with a domestic brokerage firm.
Overall, analysts expect high volatility ahead of expiry of July derivative series and are advising retail investors to be extra -cautious.
