Markets open 2022 with a bang as options writers take a bullish call

The end of December 2021 derivatives expiry has given way to a new leg of market uptrend. In just two trading sessions after the derivatives expiry, the Nifty and the Sensex managed to gain nearly 3 per cent. Analysts told BusinessLine that the market moves of the past two days suggest strong upward momentum.

On one of the best first trading days for the Indian market in years, the BSE Sensex soared 929.40 points, or 1.60 per cent, to close at 59,183.22 while the Nifty 50 closed at 17,625.70, up 271.65 points or 1.57 per cent. Still 10 per cent below their highs, Indian bourses are lagging the US markets there are trading near their lifetime highs.

Positive global cues

S Ranganathan, Head of Research at LKP Securities, said, “As India widens its vaccine coverage, bulls ushered in the New Year in style as the Nifty Bank led the rally with good support from other sectoral indices buoyed by positive global cues. Market breadth was positive with a host of small and midcaps across sectors posting smart gains.”

The past two days of gains in Indian markets, and in the US, have been despite the rising Omicron cases in both the countries, which suggests that market behaviour was not influenced as much by the Covid situation as by corporate earnings, experts said. There is a view that derivative options writers had managed to keep the market sentiment weak for the past couple of months with heavy selling of ‘Call’ options. Derivative options writers are known to control the market direction as they generate both ‘Call’ and ‘Put’ options and sell them to lay traders.

“The Nifty moved up along with a rising Put/Call ratio as option writers increased their bullish bets by selling Put options. We broke out of an expanding triangle pattern that formed over the last two months above 17,300 which confirms a trend reversal from down to up and indicates the potential to go to 18,500 in the coming weeks in anticipation of the Budget,” said Rohit Srivastava, Chief Strategist, India Charts.

According to Srivastava, the pattern observed in the market fall the past couple of months was heavy selling of ‘Call’ options, mainly by writers. Buying ‘Call’ options denotes taking a bullish stance on markets and Put options means bearish stance. This was one of the key reasons that foreign portfolio investors (FPIs) went on a selling spree in November and December. Large FPIs, institutions and brokers are often option writers.

Rally around Budget

The government is expected to announce bumper tax collections in the current financial year and, hence, will have more room for spending in the next fiscal year. This could be a big trigger for both a pre- and post-Budget rally. The Budget will be followed by elections in UP and Punjab. The BJP is seen winning a thumping majority in UP even if it loses Punjab. UP outcome is usually accepted as a cue for the national elections.

FPIs started 2022 on a positive note. Per provisional figures, they net purchased stocks worth ₹902 crore in the cash segment. In the index futures segment, their net purchases stood at ₹662 crore. They were sellers to the tune of ₹346 crore in the stock futures segment. Domestic institutions’ net purchased stocks worth ₹803 crore in the cash market.

“FPIs continuing to buy in the Indian market could be a major factor. Moreover, positivity is in the air as we enter the earnings season,” said Kranthi Bathini, Equity Strategist, WealthMills Securities.