Buccaneering traders bet Nifty rally has more legs to run on

Stock Market, Share Market

With the equity benchmarks closing in on record highs hit in October 2021, traders are building up riskier positions on the bet that the ongoing rally will sustain in the near term.

Traders were seen buying call options of the Nifty 50 index in deep out-of-money strike prices (where the underlying price is below the price set at which it is to be traded later), which are riskier than buying call options of strike prices closer to the current level of the index.

A call option provides a trader the option but not obligation to buy the index at pre-determined price in the future.

The optimism has been fuelled by hopes that the US Federal Reserve may consider pausing its run of interest rate hikes after inflation in October cooled off materially.

Buying in deep out-of-money call options is likely an indication that traders are increasingly bullish about the sustenance of the rally in the market, said derivative analysts.

Call options that were popular with traders on November 11 were 18,800 and 19,100 strike price of the Nifty50 index that expire on November 24, hinting at further gains of up to 4 percent.

The 18,800 and 19,100 strike prices saw more than 400,000 additions in open interest during the session, with their respective premiums rising 192 percent and 31 percent.

On November 11, the Nifty jumped 1.8 percent to close at 18,349.70 points, while the BSE Sensex ended at 61,795, up 2 percent. Both indices closed at a 13-month high.

Indian stocks have outperformed global peers in 2022 amid continued buying by domestic institutional and retail investors, given the resilient outlook for the economy. While the Nifty has risen nearly 6 percent this year, stocks in China and the US have fallen around 17 percent.

The International Monetary Fund expects the Indian economy to grow at more than 7 percent in 2022-23, which will make it the world’s fastest growing large economy.

“With demand in G-7 countries weakening, large domestically driven emerging economies such as India and Brazil will likely be less vulnerable to slowing trade growth than will export-oriented countries,” credit rating agency Moody’s Investors Service said in a recent note.

The recent return of buying by foreign portfolio investors in Indian stocks has also fuelled optimism among domestic investors that the market may edge higher. In November so far, foreign investors have net bought local stocks worth more than $2 billion.

“A new market high cannot be ruled out if global markets are supporting it. Investors need to be patient in this market and invest in a staggered manner,” Naveen Kulkarni, chief investment officer at Axis Securities said.

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