Market to gap up as F&O bears dive for cover

livemint.com:

Motilal Oswal Financial Services. “While markets could see fresh institutional and retail buying of CPSEs (central public sector enterprises), the rally to new highs of 20,500 and 20,750 will be aided by short-covering by FPIs and call-options sellers." NSE data show that retail and HNI clients as well as proprietary traders were cumulatively net short index options, while FPIs were net long both on calls and puts. While some of these positions are hedges, others were initiated just ahead of the election outcome.

Clients were cumulatively net short by 19,484 on Nifty and Bank Nifty call options contracts on 1 December, while proprietary traders were net short by 34,964 contracts. FPIs were net long by 54,447 contracts. Call options buyers buy calls on bullish expectations, while put options buyers buy on anticipation of a correction.

Both these buy from options sellers in exchange for a premium. If the market rises, calls rise, earning gains for options buyers and resulting in losses for options sellers. Losses for call sellers, however, will be somewhat offset if they have also sold index puts.

A call seller tends to be bearish, while a put seller is bullish. So far this year, while FPIs have net purchased shares worth Rs1.14 trillion, domestic institutional investors have net bought Rs1.73 trillion worth of shares. In addition to the capital markets segment, these market participants use the derivatives segment, principally weekly options, to hedge or punt on events such as elections or RBI policy meetings.

Analysts expect market concerns surrounding next year’s general election to abate. But the market will expect tighter fiscal measures from the government. “The market will put behind fears of an electoral upset in