In addition to shorting Nifty and Bank Nifty futures, FPIs have begun selling Nifty and Bank Nifty call options in the past six months to gain from a fall in the indices, exchange data shows.
A sale of a call involves the seller earning a premium from a buyer. If the market falls or stays flat, the seller gains; if it rises, the seller loses unless she owns the underlying stocks of Nifty or Bank Nifty.
Futures facilitate a purchase or sale of an underlying stock at a fixed price on a future date. A call option gives a buyer the right to buy an underlying stock or index at a fixed price on a future date. The seller of the call is obliged to sell the stock or index to the buyer.
While FPIs have cumulatively sold cash shares worth ₹4.26 trillion since October 2024, they’ve extensively shorted Nifty and Bank Nifty futures contracts, reaching a record high cumulative net sell figure of 201,567 contracts on Tuesday, per NSDL and NSE data.
Additionally, entities classified as FPIs have, in a departure from normal practice, increasingly resorted to selling call options on benchmark Nifty and Bank Nifty to gain from the downside since Nifty first soared to a record high on 27 September 2024, shows exchange data.
For instance, alongside index futures shorting in the past 15 months, FPIs net sold index call options on 95 trading sessions over the past 313 sessions since the Nifty first hit a record of 26,277.35 on 27 September 2024. The sales picked up since July last year and have increased this year.
In the preceding year, FPIs net sold Nifty calls only on 31 trading days out of 244 sessions, remaining buyers the rest of the time. Out of 13 trading sessions in January, they’ve net shorted calls on eight days.
From the September 2024 high, Nifty plummeted 17% to a multi-month low of 21,743.65 on 7 April. The index recovered 21% thereafter to test a new high of 26,325.8 on 1 December, after a gap of 14 months, on account of heavy domestic institutional investor buying of ₹5.99 trillion.
However, relentless FPI selling amid a falling rupee dragged markets down to a low of 25,693.25 before they recovered to test a new high of 26,273.95 on 5 January.
Fresh headwinds
But, fresh tariff tensions over Greenland, lack of clarity over consummation of a trade deal with the US, and a falling rupee soured sentiment among FPIs again, dragging the market down to 25,232.5 on Tuesday.
This roller-coaster ride has enabled FPIs to gain from their net bearish call positions apart from the short futures bets. When they take fresh short positions on index calls, FPIs pre-empt a fall in the following sessions.
“Such a significant shorting of calls is to profit from anticipated downside or flat markets by FPI prop desks who are using weekly options expiries to take very short term bets amid the external headwinds,” said Kruti Shah, quant analyst at Equirus.
As of Tuesday, the FPIs held cumulative net shorts of 60,114 index call contracts, in anticipation of further downside in markets in the sessions ahead.
“FPI shorting of Nifty calls increases the odds of further volatility in the sessions through the Budget (1 February),” said S.K. Joshi, consultant, Khambatta Securities.
Joshi explained that the falling rupee dampens FPI dollar returns and with rising yields in US bonds, they prefer the safety of treasuries back home.
U.R. Bhat, co-founder of investment platform Alphaniti Fintech, termed the fresh shorting of calls on Tuesday as a sign of FPIs’ intention to sell more in the cash market in the sessions ahead.
For instance, if an FPI shorts Nifty calls and the next day sells Nifty heavyweight stocks, the index call will also fall, enabling the FPIs to pocket premiums paid by the call buyers.
FPI returns in dollar terms on Nifty have been a negative 11.5% between 27 September 2024 and 20 January 2025, thanks in great part to the fall in the rupee. Over the same period, the Nifty in rupee terms had fallen 3.75% to 25,232.5.
The rupee has plunged 8.8% over the same period to 90.97 as on Tuesday.
