Derivatives traders unwind positions ahead of holiday-shortened expiry week

Put writers are unwinding positions and shifting to lower strikes, while call writers are increasing bets at higher levels, suggests traders lack confidence in a sharp move up.

Derivative equity markets saw cautious action on August 26 as traders trimmed positions ahead of Wednesday’s market holiday and the monthly expiry slated for Thursday, with impending Trump tariffs weighing on investors.

US President Trump’s additional 25 percent tariffs on India are set to come into effect from August 27, keeping the sentiment weak as stocks tumbled sharply in late session on Tuesday.

More Bets Against Upside

The sentiment has likely shifted in the options setup, said Ajit Mishra, SVP at Religare Broking, adding that until Monday, put writers were active with 24,800 strike acting as a key support, implying a bet on stable markets. However, Tuesday’s market fall has been followed by call writers - those betting against further upside - turning aggressive at the same strike price of 24,800, effectively capping any meaningful upside.

Why This Matters

The open interest at 24,800 has now risen to nearly 1.4 crore contracts from 1.2 crore earlier. Below this, the 24,600 level is likely to act as a strong base, coinciding with the gap created on August 18 after PM Modi’s announcement of GST reforms, Mishra added.

In simpler terms, traders who were earlier betting on 24,800 holding up as a ‘floor’ for the Nifty have now turned cautious, and fresh bets are building up on the downside.

Sahaj Agarwal, Head of Derivatives Research at Kotak Securities said that while some downside is possible from current levels, the broader trend still indicates markets may remain sideways.

“The weekly setup was corrective and the new developments on the tariff front have pushed the market downwards. Upside remains limited for sure, while on the downside a sustained move below 24,750 could invite further selling pressure,” he said.

Premium Decay

Rajesh Palviya, Senior Vice President – Technical and Derivatives Research at Axis Securities agreed with this narrow-band assessment. With Wednesday being a trading holiday, option writers could enjoy a one-day premium decay advantage.

A premium decay advantage refers to the benefit that option sellers gain from the fall in an option's premium as it nears expiry. Driven by the erosion of time value, this decay allows sellers to profit from the natural loss of value in an option.

“Unless there is a big move on expiry day, (option) writers will stay in control. Based on the current setup, expiry is likely to remain within the 24,800-25,000 band. Only a decisive move beyond this range could hurt writers, but till then, they remain in the comfort zone,” Rajesh Palviya said.

Dhupesh Dhameja of SAMCO Securities said call writers have taken control, particularly at the 25,000 strike, where open interest has jumped to 1.57 crore contracts. This heavy writing signals that traders see 25,000 as a strong resistance zone and are betting against the index breaking past it in the near term.

On the flip side, the 24,900 strike has emerged as a key support with nearly 96.82 lakh put contracts - the second-highest open interest on the put side. He added that the Put-Call Ratio (PCR) has improved from 0.61 to 0.77, indicating a gradual shift of put writers to slightly higher strikes. But call writers continue to dominate, keeping the upside in check.

Kotak’s Sahaj Agarwal said the volatility could stay high, there is no structural weakness showing up in market data. What makes the positioning more relevant this week is the calendar. With a trading holiday on Wednesday and expiry on Thursday, market participants appear unwilling to carry aggressive bets.

As a result, positions are being unwound or adjusted, and the 24,800-25,000 range has become the focus of action. The compressed window leaves little room for risk-taking, making expiry week volatile but range bound.

Bank Nifty

Meanwhile, Laxmikant Shukla, Sr. Technical Analyst of equities at YES Securities highlights that bank nifty remains a laggard. "It has underperformed the benchmark index with sustenance below the recent low, and calls writing has shifted its range even lower. Therefore, the undertone is likely to remain negative as long as banknifty remains beneath 55k," he said.

Sahaj Agarwal has pegged the support for Bank Nifty at 54,000, and sees the index relatively weaker compared to the broader market.

SAMCO’s Dhupesh Dhameja said traders are turning defensive, with heavy call writing at the 55,500 strike and open interest rising to 22.49 lakh contracts, traders are viewing this level as a strong resistance.

At the same time, the 55,000 strike holds the highest put open interest at 14.37 lakh contracts, making it an important support. However, put writers unwinding positions and shifting to lower strikes alongside call writers increasing bets at higher levels shows traders are less confidence of a sharp rally.

The open interest in Bank Nifty has fallen by 5.02 percent while the price has dipped slightly by 0.06 percent. Falling OI, with a marginal price decline suggests long unwinding, as traders are closing out existing long positions fearing less chance of further gains.