The fear of missing out on the stock market rally seems to have caught up with foreign portfolio investors (FPIs) too. In a rare trade set-up, FPIs are now holding more index call options than puts. In simple terms, it indicates that FPIs did not want to miss out on any potential sharp upmove in the stock markets.

Buying a call option is going long on the markets while a put is similar to short selling.

Most FPIs and high networth individuals (HNIs) were caught on the wrong foot last Wednesday, just a day ahead of October month derivative expiry as Bank Nifty index jumped 800 points in a single trading session.

Traditionally, FPIs have been going short on Bank Nifty index and PSU Banks and long on private banks. But last Tuesday’s government announcement of a massive bank re-cap package saw traders rushing to cover their short positions leading to a colossal spike in PSU Bank stocks and Bank Nifty index. Not only did most FPIs cut their positions in losses but were caught unhedged for such an event. Also, FPIs have been net sellers since July in the cash segment.

“Derivative positioning now suggests FPIs and HNIs are now positioned for further upside in the markets,” said Rishi Kohli, MD & CEO, ProAlpha Capital, a quant fund. “Instances of such derivative trade positioning has been less than 1 per cent in the past five years.”

Data showed that FPIs held 1.46 lakh contracts of index calls as on Monday compared to 1.14 lakh put options. Usually, FPIs hold more index put options than calls and are often hedged for a sharp market decline, but this time the strategy has reversed. “Derivative positioning shows FPIs are unhedged for any sharp decline in the markets compared to the past,” said Rohit Srivastava, Fund Manager, Sharekhan-BNP Paribas. “Usually such a phenomena happens when markets are near their tops. As of now, net long positions are 2 per cent of the entire derivative open interest in India, which is the highest in over two years.”

FPIs were caught unawares on at least two occasions when the market witnessed sharp surges in the past few months. The first time was in July when the Nifty index traded at around 9,500 and SEBI banned P-Notes. The second time was last week during the PSU re-cap announcement. Both these announcements contributed in a big way to the near-1,000-point surge in the Nifty index.

Related Topics