Proprietary traders and foreign portfolio investors (FPIs) raised significant bearish bets in index derivatives on Friday, indicating that stock markets may open the last trading week of 2025 on a cautious note.
The week is significant as it also sees the year-end expiry of Nifty and Bank Nifty derivatives on Tuesday.
Proprietary or prop traders, which include brokers who run their own trading books and high-frequency traders, increased their cumulative net short index call option positions on the Nifty and the Bank Nifty by 120,022 contracts on Friday from 53,442 contracts on Wednesday, as per data from the National Stock Exchange (NSE). Markets were shut on Thursday for Christmas.
FPIs increased their cumulative net short calls by 13,953 contracts from 2,422 contracts during this period, while retail and high-net-worth investors and domestic institutional investors were net buyers.
Calls are generally sold when traders expect the markets to remain flat or correct. This enables them to pocket the premiums paid by the call buyers. Simultaneously, the purchase of more index puts adds to the bearish sentiment.
Nifty options expire on Tuesday every week, while Nifty futures and Bank Nifty futures and options expire on the last Tuesday of a month.
Traders either roll over their futures positions or let them settle at expiry, depending on their sentiment.
Expiry data is closely watched by participants to gauge market sentiment. Large institutional desks are generally considered more market-savvy than retail /HNIs. Mutual funds generally don't write or sell index derivatives, as that exposes them to huge risks.
“The last expiry surely looks like markets will remain sideways within a 25800-26200 range with a bearish bias amid thin volumes,” said Kruti Shah, quant analyst at Equirus Securities. “Trading volumes generally thin during the year-end with most investors away on holiday.”
In addition to selling calls, prop traders increased their cumulative index put longs by 72,073 contracts on Friday from the previous session. FPIs raised their index put longs or purchases by 52,077 contracts over the period.
Put options are purchased on the anticipation of a correction. FPIs and prop traders buy puts as a hedge to their cash portfolios or simply to bet on a fall. Their recent combination of short calls and long puts is likely to increase market volatility on the downside.
The build-up of bearish sentiment follows the Nifty's inability to sustain above its fresh record high of 26325.8 hit on 1 December, despite the Reserve Bank of India (RBI) cutting a key interest rate by 25 basis points to 5.25% earlier this month.
Analysts attribute the Nifty's failure to sustain above its record high to expensive valuations—the Nifty trades at roughly 18 times FY28 earnings (historical PE ranges between 16 and 20 times)—amid slower earnings growth due to weak domestic demand. They added that unless earnings growth picked up, high valuations cannot be justified.
While FPIs have sold a record ₹2.32 trillion in the cash market so far this calendar year, DIIs led by mutual funds have purchased a record ₹7.72 trillion, according to data from National Securities Depository Ltd (NSDL) and BSE.
This has helped the Nifty recover almost 20% from its year-low of 21743.65 on 7 April to 26042.30 on Friday. However, supply through primary issuances and FPI outflows have capped the upside.
While such a heavy short build-up by traders also raises the prospects of a short-covering-driven rally, analysts predict a corrective trend in the very short term unless the Nifty convincingly breaches its high from earlier this week of 26,236.
“Unless momentum drives the Nifty past the 26240 mark, we expect the year-end expiry to be a lacklustre affair,” said Sahaj Agrawal, senior vice president, research (derivatives), Kotak Securities. “Much of call selling relative to put selling indicates the market is in a corrective phase through Tuesday.”