FIIs position in options suggests that risks are high
Foreign institutional investors' net options positions in the past few weeks have been hovering at the lowest level since January 2012
Foreign institutional investors’ (FII) net options positions in the past few weeks have been hovering at the lowest level since January 2012, according to data compiled by Ambit Capital Pvt. Ltd. The net options position is calculated by subtracting the total puts contracts from the calls contracts. A put option allows an investor the right to sell shares and a call option gives the right to buy securities at a particular price on a future date.
When there are lower net put positions in the system, it means investors are not protected on the down side in the event of a sell-off or a risk aversion in the market. Thanks to the gush of liquidity, FIIs have been long on Indian equities on optimism that the Narendra Modi-led government is going to fix the ailing Indian economy.
“But since the net option positions are close to negative, it gives a signal of a high degree of complacency in the markets. In case of an adverse event or news flow, the fall in the market could be steep as the investors would have to run for protection," said Gaurav Mehta, vice-president of institutional equities at Ambit Capital.
This, coupled with stretched valuations and low implied volatility, may not be healthy for the market in case of a correction. It’s time to be very cautious.
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