India's options market buzzed with activity before the West Asia peace deal was announced over the weekend, with bears scurrying for cover while bulls drove up the Nifty almost 3% over two sessions through Monday.
On Friday, options activity flipped after two months, with the total value of outstanding puts sold relative to calls higher by ₹51,117 crore, per analytics firm IndiaCharts. A day earlier, the value of outstanding calls sold exceeded that of puts sold by a whopping ₹1.89 trillion, implying bearish sentiment.
When options traders sell more puts than calls, it's a bullish signal as they expect markets to rise, allowing them to pocket the premiums paid by put buyers.
Despite two days of a strong rally, analysts remain cautious, given the previous hitches in striking a peace deal in West Asia, forecast of weak monsoon, and India's missed global AI trade. This is reflected in options activity, which shows 24000 to be a veritable resistance for bulls.
Friday's flip, or short covering, was largely behind the Nifty's 461 point or 1.99% rally through 23622.9. The rally extended by 0.98% to 23853.9 on Monday after the US and Iran announced they would sign a peace deal on Friday.
However, the Nifty closed well below its high of 24011.4, indicating apprehension about the durability of the deal.
A similar, though less dramatic flip was seen on 7 April, when the US and Iran reached a ceasefire, leading to bulls selling ₹50,396 crore worth of marketwide puts over calls, resulting in a rally of 3.78% to 23997.35 a day later. But the fragility of the peace deal didn't make this flip durable.
While short covering, largely by foreign investors, could continue this time around, analysts caution that its extent would hinge on the sustainability of the deal and the unfettered reopening of the Strait of Hormuz. The Strait's closure impacted daily global supply by 10% .
"This is good news, but markets will take cues from the sustainability of the peace deal, and to a lesser extent from the below par monsoon and global AI trade," said Nirmal Jain, founder of IIFL group.
Jain is confident of bullish market prospects, particularly those of large caps, if the deal sustains. On AI, he believes the trade is almost near its top after the successful listing of SpaceX and that a reversal would revive foreign portfolio inflows into India, especially after the RBI undertook a raft of measures earlier this month to attract foreign capital.
While the monsoon could have some impact on markets, it was "too early to call" until the full extent of the El Niño becomes clearer, Jain added.
V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, said from the Indian markets' perspective, the impact of falling crude prices weighed more than the AI trade or below par monsoons.
"I am sure the durability of the peace deal will be more on the market radar, than the other two imponderables (monsoon and AI trade)," he said.
Brent crude has tanked 30% from a high of $119.5 at the end of March to $83 a barrel, as markets discounted a peace deal, per data from investing.com.
"This (falling crude) would ensure the CAD (current account deficit) doesn't double to 2% of GDP as anticipated in the current fiscal amid elevated crude price, which is a great relief and could result in a tapering of FPI cash outflows and derivatives short-covering, " said Vijayakumar.
Recent measures undertaken by the RBI and the government, including removing taxes and capital gains on FPIs' debt investments, increasing interest rates on NRI dollar deposits, and relaxing norms for external commercial borrowings by Indian corporates, could also provide additional support.
While markets have cheered the proposed peace deal, bears are still strongly positioned at the 24000 call level, indicating that the going won't be smooth for bulls, despite recent short-covering.
Nifty options contracts, expiring this Tuesday, indicate bears have sold a huge quantum of calls at 24,000, whose open interest (OI) or outstanding positions stand at a provisional 445,337 contracts. In comparison, OI at 24000 puts expiring on Tuesday stands at a much lower 118,815 contracts, per NSE data.
Even in monthly Nifty options expiring on 30 June, OI in the 24000 calls stands at a provisional 119,203 contracts, against OI in the 24000 puts at a provisional 82,244 contracts, per NSE.
This shows relatively more bearish aggression at 24000. Nifty weekly options contracts expire each Tuesday, while the Nifty monthly contract expires on the last Tuesday of every month.
"We have seen put value exceeding call value in April too, but that didn't last for long. I am hopeful with the West Asia deal in place at long last that traders will continue to sell more puts than calls on an outstanding basis," said Rohit Srivastava, founder, IndiaCharts.
At Monday's closing of 23853.9, the Nifty traded 5.5% below its pre-war level of 25178.65 on 27 February.
The fall has been led by FPI selling of shares worth ₹2.86 trillion since the war began on 28 February to 12 June. Though domestic institutional investors net purchased shares worth ₹3.35 trillion over the period, the markets fell as FPI selling was absorbed at lower price points.