Bears who had closed out much of their negative options bets—stocks plus index—on Monday, causing the market to rally by four-fifths of a percent, initiated fresh bearish positions on Tuesday. This creation of negative bets caused the market to fall seven-tenths of a percent from the day’s high to close in the red.
The aggregate value of puts exceeded that of calls by ₹1,181 crore on Monday. This means bulls sold more puts even as bears closed out their bearish call positions.
“Markets tend to make a short-term top when the outstanding value of puts sold exceeds that of calls sold,” said Rohit Srivastava, founder of analytics firm IndiaCharts.
This occurrence happened on Monday after the Nifty 50 rallied 0.8% from Friday’s close of 24,427 to 24,625 points. On Tuesday, the Nifty flipped 0.7% from the day’s high of 24,756 to close in the red at 24,580, down 0.2%, as bears initiated fresh call selling, resulting in the value of calls exceeding those of puts by ₹15,362 crore. At 1:05 pm on Wednesday, the Nifty was up 0.08% at 24,600.30 points.
However, for bulls to prevail the index must convincingly breach Tuesday’s high.
“Now, unless the Nifty convincingly breaks Tuesday’s high of 24,756, we will go lower. Bulls have their hands full with keeping the market from going lower amid a stinging tariff war between US and India,” said Srivastava.
Tariff tensions
The US has imposed a crushing 50% tariff on Indian goods, half of it as a penalty for importing Russian energy.
The market fell from 24,574 on 6 August to a low of 24,363 on 8 August, recouping to 25,084 on 21 August after Prime Minister Narendra Modi announced a goods and services tax (GST) rationalisation on Independence Day (15 August).
But as the tariff tensions intensified, especially after Modi attended the Shanghai Cooperation Organisation summit on Sunday-Monday, the markets slipped again on Tuesday driven by fresh bearish option bets creation.
In the past too, whenever the reading has turned negative—with the value of puts exceeding those of calls—the markets have fallen shortly after. For instance, when the outstanding put value exceeded the outstanding call value by ₹9,061 crore on 20 August, the Nifty fell from 25,050.55 to a low of 24,405 two days later.
Similarly, when call minus put hit ₹42,531 crore on 3 March, the market fell 8.1% from 23,658 that day to a low of 21743.65 on 7 April, when US President Donald Trump announced reciprocal tariffs on trading members.
Fleeing foreign investors
Puts and calls are normally dealt with between retail and high-net worth individual clientsand foreign portfolio investors. FPIs have remained cautious on Indian markets since September last year, a few months before Republicans wrested power from Democrats in the US on 20 November, on concerns of a tariff war between the US and its trading partners.
This year so far, FPIs have net sold shares worth ₹1.8 trillion in the secondary market.
While domestic institutional investors have absorbed this with net purchases of ₹5.2 trillion, a tearaway market rally has been hard to come by because of the relentless FPI selling in the cash and derivatives market segments, per S.K. Joshi, consultant at Khambatta Securities.
FPIs’ equity assets under custody stood at ₹71.96 trillion as at 31 July, per NSDL data. The average net assets under management of equity-oriented schemes of mutual funds stood at ₹33.47 trillion as of 31 July, as per the Association of Mutual Funds in India.
“From the medium-term perspective, we see strong support at 24,200 levels,” said Sahaj Agrawal, senior vice president, derivatives research, at Kotak Securities.
Agrawal added that trending moves could happen if the 24,200 level sustains, although a breach could put the markets back into a corrective phase.
For the near-term, lack of momentum setup in the data suggests possible sideways movement in the range of 24,000-25,000, he added .
