Retail investors, including high-net-worth individuals, have suffered significantly this week amid a market decline to below the 24,000 level, which has served as strong support for weeks.
These investors, who tend to be net buyers of index call options—the Nifty and the Nifty Bank—and net sellers of puts, apart from being bullish on stocks, actually played a negative card for this Tuesday's weekly Nifty expiry.
After being net long until last Thursday, retail turned net sellers of index calls on last Friday and this Monday, expecting the Nifty to correct, which happened, and they pocketed gains.
A call seller, or bear, gains when an underlying index or stock falls or remains flat. A put seller, or bull, gains when the opposite happens. Call buyers are bullish, while put buyers are bearish.
Wrong bet?
However, they have turned net bullish on index options again since Tuesday, expecting the 24,000 support level to hold despite the resumption of fighting in West Asia, weeks after a fragile ceasefire signed by the US and Iran on 17 June came apart.
But the fall in the markets, with the 24,000 call expiring on 28 July (coming Tuesday), since they again became buyers, has burnt their fingers.
The 24,000 call has fallen almost 80% to ₹75 per share—65 shares make one contract—on Thursday, down from ₹343 on Monday. The cohorts turned long index calls on by 146,775 contracts on Tuesday, showed data from the National Stock Exchange.
This after turning net short on index calls by 211,750 contracts on Friday and 104,565 on Monday. The sellers on index calls tend to be foreign portfolio investors, according to NSE data.
“The steep fall in calls has trapped the buyers, thanks to a surge in geopolitical tensions,” said Kruti Shah, quant analyst at Equirus Securities.
The tensions, which began building since 10 July, saw Brent crude surge 31% to $100.69 a barrel on Thursday, according to investing.com. India, the world's third-largest importer of crude, suffers a balance-of-payments problem when Brent rises sharply, as it has since the war began in early February.
A continuation of hostilities could further disrupt global oil supplies, with Iranian-backed Houthis expanding the conflict into the Red Sea and threatening Saudi oil shipments. Already 10% of the daily global oil supply of 104 million barrels has been taken off due to the closure of the Strait of Hormuz, according to S.K. Joshi, director, Khambatta Securities.
“Resumption of hostilities will impact our markets, which have held up pretty well around 24,000 so far,” said Ketan Marwadi, managing director, Marwadi Shares and Finance Ltd.
The benchmark Nifty fell nearly 2% from 24,334.3 last Friday through 23,869.6 on Thursday.