See surprise ahead, mkt going to hold up: Nomura

Buying of Put Options dominated the market last week and Tushar Mahajan, Head of listed Futures & Options-India, Nomura believes a runaway rally caught a lot of investors by surprise. According to him, yesterday when there was a massive sell-off on Options, it actually reiterated the fact that the market was going to hold up and there are some positive surprises in the near future; a rate cut is on the cards.

Also read: Nifty poised for 6300, Bank Nifty support at 11,800: JM Fin
As far as the March series is concerned, Mahajan considers 5850-5840 to be strong supports on the Nifty Futures. "I would tend to probably hedge myself to those levels. Maybe just buy a 5800 Put on the downside and continue to play long through my stock Futures or the stock Calls trades," he added. Here is the edited transcript of the interview on CNBC-TV18. Q: What have you made of that huge buying of Put Options over the course of the week and the subsequent unwinding that we may have seen yesterday?
A: To my mind we had a runaway rally last week which caught a lot of people by surprise, unless you were positioned wrong. Then in the earlier part of the week you saw the first rounds of cracks in the market. I think that is where you saw a lot of Foreign Institutional Investors (FII) coming in to hedge their portfolios through some longer Out of the Money (OTM) Puts.
The Implied Volatility also were pretty cheap and it did not hurt to pay maybe 1 percent or so and save your gains for the kind of move that we saw in the week before this. What happened yesterday was a bit surprising though. As the markets inched up from the lows of the morning yesterday, we saw this massive selloff on Options. That indicates that people are getting more convinced with the fact that the markets are going to hold up and we will see some positive surprises coming in from Reserve Bank of India (RBI) as well.
That was what was interesting and after the runaway rally you saw some hedge buying. But, yesterday’s move gave in some confidence and people started unwinding those Puts and very clearly the 5600 strike seems to have been the one in action across the earlier part of the week and yesterday as well. Q: What have you made of the move in the India VIX over the last few days and the way Implied Volatilities (IV) have started moving? Did you see any cooling down yesterday suggesting that people are now expecting no measure downside?
A: Surprisingly so. For the kind of moves that we saw yesterday from the lows of the day to where it closed, almost a 120-130 point move through the day, you do not see these moves too often in Nifty anymore. We saw the VIX coming off and that was more to do with the fact that the 5600-5700 Puts which got bought earlier in the week were being sold off and that led to the IVs coming off.
 
Globally also you have seen the VIX indices trading at pretty much their multi-year lows and that is going to be a trend which will come through in India as well. Q: Would you be worried about the fact that the market has lost a lot of its hedge and in that sense is more vulnerable or do you think things are looking like a clean long? Are you playing it that way?
A: The worries in the market definitely do not seem to go away. We live in a global world. There are issues globally and locally as well. We have a big event coming up on Tuesday next week, with the RBI policy.
The fact that the market has suddenly lost so much of its hedge over the last two days or so worries me a little bit. If the RBI were to surprise the markets negatively or if there are macro releases which surprise the markets negatively, then we could open ourselves to a much bigger downside.
 
But, for the moment it does not look like anyone globally or locally in India seems to be too worried about that. If I were trading, I would look to buy some OTM protection at these levels.
_PAGEBREAK_ Q: Any clear indications of what the FIIs are up to now? After having cleaned out their positions in the Options market how are they playing this? Are they taking clean long positions? It did not look like that from the Nifty Futures figures. What exactly are they doing now?
A: We continue to see a huge amount of inflow which continues to come into India. Subsequently, we also continue to see some negative pressure build up on both the index Futures and stock Futures. Then we saw this Put buying earlier in the week. My sense is that people are positioning themselves for a bigger long and hedging part of their portfolio through the Futures and Options space. That is going to be a trend which is going to continue to last for a while.
If you see, index Futures are also starting to see considerable buying coming through over the next few days. That would be a sign where people are just going all guns blazing on the markets. Q: What is your strategy for the rest of the March series, or recommendation to clients on the index?
A: The index gets some support around 5850-5840 odd levels and to my mind that is a strong support. I would tend to probably hedge myself to those levels. Maybe just buy a 5800 Put on the downside and continue to play long through my stock Futures or the stock Calls trades. Q: How would you position yourself in the Bank Nifty now given the volatility yesterday and leading up to the monetary policy next week?
A: The bond market yesterday seemed to discount the inflation data completely. You saw a big rally in the markets with the yields coming off. There is a considerable pressure seeming to say that RBI will cut some rates right now. The trade to probably play is going to be through a mix of public and private sector banks where the falling yields could help the public sector banks to rally further.
I would probably look at banks like the State Bank of India (SBI) and Punjab National Bank (PNB) to move more on rate cut announcements and that is the trade I am going to be putting on. Q: Do you still sense the kind of optimism you are talking about on the index on individual stocks or there is still a fair amount of short position open?
A: I think sectorally we are seeing a big churn and that is what seems to hold up the index. In case of individual stocks, especially on the midcap space and otherwise, sectorally tend to get decimated. I think the trick of the game right now is to move ahead of the pack with respect to identifying sectors which will end up moving.
We have seen big moves on IT, we have seen the bank space showing a reasonable strength and that forms a considerable chunk of the index. Going forward, I would continue to play with sectoral themes within the index rather than identifying individual stocks because that has become a bit tricky to trade. Q: If you have taken that call to trade it long on the index, are you working with targets right now or are you just going with the flow and keeping much smaller targets in place for the index?
A: Technically 5970 is a critical one. That has been a level where the index is seen coming off almost three times in the last three or four weeks. If that breaks through, I would probably be inclined to play it all the way to 6050-6080 odd levels. Q: Any stocks or sectors where you still see a lot of short positions existing, where there could be some short covering impulse?
A: We have seen some of that going out from private banks yesterday. Other than that, massive shorts continue to be in the metals space. That is a space which does have a risk of short cover coming through. That is the only one which is really obvious in terms of the huge amount of short interest or maybe stock specific names like Bharat Heavy Electricals Limited (BHEL).