derivatives: Bearish derivatives bets rise to levels seen at Covid onset

Mumbai: Institutional investors have mounted bearish derivatives wagers on Indian equities as the strengthening dollar and elevated interest rates in the US have heightened uncertainty in the near term. Foreign funds’ net bearish index futures positions were 77% of their total bets on Monday – reaching almost the level seen at the onset of Covid in March 2020, according to analysts.

Domestic institutions’ net bearish positions at 74% of their total bets were the highest in the past three years, said analysts. FPIs have sold shares worth ₹21,000 crore since September 1, while DIIs bought shares worth ₹22,175 crore during this period.

“FPIs’ short position in the index is around the Covid times in 2020 while the quantum of short positions that the DIIs have open is around the highest point in last three years at 74%,” said Viraj Vyas, technical and derivatives analyst at Ashika Stock Broking.

Analysts said the bearish bets indicate that these institutions believe the market might be vulnerable to a sell-off.

“The market seems to have found a durable support around 16,800-17,000 zone, but short covering is possible if the index breaks out above 17,400 level,” said Vyas.

FIIs held cumulative index net short positions of 91,582 contracts on Monday. DIIs’ net short positions in index futures were 57,607. The Nifty, which declined 1.25% in the past month, has struggled to move outside the 16,750-17,450 zone.

“FPIs’ long-short ratio is much lower in recent past which indicates that they are having more bearish stance in the market than bullish stance,” said Chandan , head – technical & derivatives research, . “The ratio indicates a bearish tone, but over-optimism also indicates limited downside. We have noticed that FPIs’ long-short ratio also acts as an overbought and oversold signal so that it can provide a contra view as well.”

Many of these short positions especially by domestic institutional investors are hedges against their share portfolios.

“Uncertainty in the global environment, be it economic or geopolitical, has led to institutions incorporating short positions in their portfolios or against them,” said Siddarth Bhamre, head of research

Broking. “It’s important to note that though positions percentage might be at a record high, we have not witnessed any major rise in OI nor the quantum of fall is significance.”

“Also, these shorts beyond a point act as a strong support to the markets and upon clarity act as a fuel to upside rally,” said Bhamre.