The stock market slipped decisively below the Nifty's crucial 24000-support earlier this month, but derivatives traders remain bullish, continuing to hold the maximum put options contracts at this level for the monthly expiry on 29 September.
This means that as of now, they expect the market to close at or above that level at the end of the month. If that happens, they retain the premium paid by the put buyers. Analysts said traders have taken this stance they expect tensions between the US and Iran to abate by the month-end.
The 24000 put expiring on 29 September had 93151 contracts outstanding as of Friday, while the 24000 call had 130,891 contracts outstanding. Both these had the highest concentration among all other strikes or levels. Nifty options have a price interval of 50 points.
However, persisting upside pressures on crude oil and global bond yields began forcing at least some of these bulls to close out their positions last week, resulting in a steep jump in the option prices.
The open position at the 24000 put slipped from 112,981 contracts last Monday to 93151 contracts on Friday, underscoring the tension among sellers.
Analysts said worsening external headwinds could threaten the Nifty's next support at 23000 and the index may head to around 22800 levels. For now, they don't expect the Nifty to plumb to the 52-week low of 22182.55 reached at the height of the West Asia conflict on 2 April.
Part of that fall, they said, would be worsened by short-covering of put options sold at higher levels, say 24000, by the bulls.
"Rising crude and bond yields are queering the pitch for the market," said Shrikant Chouhan, research head at Kotak Securities. "Bulls probably reckon a tamping-down of Middle East tensions, which is why the positions are strong at 24000. We will have to wait and see."
The price of benchmark Brent crude oil has risen by 20% through $107 a barrel over the past one month, with the theatre of war in West Asia expanding to the Red Sea from the Strait of Hormuz, crimping supplies from Saudi Arabia.
Over the same period, yield on the US 10-year bond has risen by 6% to a historic high of 5%, adding to fears of an interest rate hike. The India 10-year benchmark bond yield has also spiked by 20 basis points to 7%, raising concerns of an interest rate hike at the RBI's forthcoming monetary policy meeting on 5-7 October.
Data on oil and bond yields are from investing.com.
"We advised our institutional clients to purchase a 24000 straddle earlier this month as we were anticipating a sharp move either side, which seems to be heading south," said Kruti Shah, quant analyst at Equirus Securities.
A long straddle involves purchasing a call and put at the same strike or level with buyers expecting a sharp move either side.
Foreign portfolio investors are net sellers of Nifty calls, while retail and high net worth investors are net sellers of Nifty puts indicates NSE data.
Put sellers are bullish while call sellers are bearish. Put buyers are bearish, while call buyers are bullish.