Market may make pre-budget bottom at 22,800

livemint.com:

Subscribe to enjoy similar stories. In an indication that markets might be nearing a bottom ahead of Saturday’s Union budget, options sellers have been ramping up positions at the 22,800 strike Nifty put option, which expires on Thursday, 30 January. This implies that Nifty faces a strong likelihood of getting support at 292 points or 1.3% below Friday’s closing of 23,092.20 ahead of the budget.

Market hopes are pinned on potential tax relief for salary earners in the budget to give a boost to consumption, which has slowed down, and an increase in government spending to lift corporate profitability. To be sure, when option traders expect markets to stay above a certain level, they tend to build up positions—referred to as open interest (OI)—or sell at that level to those who believe markets might fall below the same level. The seller believes the market won’t fall below that mark while the buyer believes it will fall.

Who is right? “The stronger players are usually the option sellers," said Sudhir Joshi, consultant at Khambatta Securities. That's because, Joshi explains, option sellers take on greater risk than option buyers, whose maximum loss is restricted to the premium paid to the seller for the option even as maximum profit can be unlimited if market goes in their favour. While the option buyers’ risk is limited, the sellers face unlimited risk if the market goes against them even as the most that they earn is limited to the premium received from the buyers.