Mumbai: Markets which had so far discounted a full-fledged war between India and Pakistan seem to have raised a note of caution in the last two-and-a-half hours of trade on Thursday, when news surfaced of India thwarting Pakistan’s missile attack on 15 of its military installations on the intervening night of 7-8 May.
The escalation followed multiple air strikes conducted by India on Pakistan and Pakistan-occupied Kashmir in the wee hours of Wednesday to avenge the massacre of 26 tourists in Pahalgam by Pakistan-backed terrorists on 22 April.
Put-call ratio signals caution
The aggregate Nifty put-call ratio (PCR) hit 1.89 on Thursday, the highest reading since the data has been collated on this variable from 1 April 2021, by analytics firm IndiaCharts. Simply put, this means for every 100 calls traded on Thursday, 189 puts changed hands.
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When more puts are traded relative to calls, it reflects heightened caution among investors and traders who demand more of them. While buyers wanted more of them, sellers refrained from selling them as many by end of the day, given that they would lose hugely if the Nifty falls on Friday or next week.
Though volumes were high during the day, put sellers squared off their positions by the end of day, fearing volatility ahead. This became evident in the outstanding or open interest put-call ratio dipping to a provisional 0.86 on Thursday from 0.97 a day earlier-a clear sign of heightened volatility in the sessions ahead.
Volumes refer to the number of contracts traded during the day and open interest refers to positions carried forward. While put-to-call volumes hit a multi-year high, the open interest PCR fell, reflecting fear among option sellers of carrying forward short put positions. If the Nifty falls in sessions ahead, the put sellers will be subjected to huge losses. That’s why they sold fewer puts than calls by the end of day, a signal of heightened caution, said market analysts.
“While panic didn’t strike stock market investors today (Thursday), following news reports of a rise in escalation between the two sides, they surely became more cautious, something which we didn’t see since the Pahalgam attacks,” said Rohit Srivastava, founder of IndiaCharts.
The heightened caution was also reflected by fear gauge India Vix rising by 10.21% to 21.01, the highest since 7 April when Vix surged 65.69% to 22.79 in the wake of the global trade war intensifying. Vix rises when uncertainty increases and falls when investor confidence increases. A rise in Vix raises the price of puts relative to call options, while a fall means put prices rise less than calls.
Weekly Nifty options now indicate a range of 2.17% up or down from 24300. The Nifty closed at 24,273.8 on Thursday, down 0.6%. Data indicates a range of 23,771-24,829 over the next few sessions, with a bias for the downside.
Market expert Swarup Mohanty, vice chairman and chief executive officer of Mirae Asset Investment Managers, said his policy was to stay invested in Indian equities at all times and any drawdown is used to invest in “quality”.
Nilesh Shah, managing director of Kotak Mahindra Asset Management Company Ltd, expects any potential conflict between the two nuclear-armed neighbours to be limited and not prolonged despite the two sides climbing up the escalatory ladder on Wednesday and Thursday. He expects the markets to stabilise in light of a limited conflict.
