Bearish options cast doubt on India, EM Asia’s best stock market

1. Positioning Surge:

Outstanding positioning in index puts covering three underlying instruments - Nifty, Bank Nifty and Nifty Financial Services and all active weekly and monthly expiration cycles - is close to scaling a new record.

2. Foreign Investors:

Foreigners have increased both their long and short exposures in index puts over the last week, with the net positioning currently positive. However, shorts have been created at a faster pace, pulling the long-to-short spread into an area that has served as a floor several times over the last month. Any bounce in the spread from this zone will mean foreigners’ outlook on the market is turning more cautious.

3. Retail:

Retail investors have been active in index puts, judging by recent history. For perspective, retail longs and shorts as a ratio of foreigner positioning currently stand at 4.5x and 5.8x respectively. More notably, the long-to-short spread has swung from a net short of 275,000 less than a week ago to nearly 72,000 as of Monday, which suggests retail is starting to buy downside hedges, indicating bearish market bets.

4. Proprietary Funds: 

Prop positioning via index puts also recently scaled new peaks, but net positioning at the start of this week stood at -411,000 contracts. This reading is in an area that over the last 12 months has marked important bottoms, so any turn to the upside from here would mean that the outlook of these participants is also turning pessimistic.