FIIs ramp up F&O short positions ahead of election results; may need quick covering post exit polls

On May 31, 2024, FIIs activity in derivatives included buying index futures worth Rs 8130.2 crore and selling Rs 9180.9 crore, resulting in a net sale of Rs 1050.7 crore.

Foreign Institutional Investors (FIIs) significantly increased their short positions in the Indian derivatives markets on May 31, which may need quick covering after the exit polls showed BJP-NDA winning elections with an overwhelming majority -- an outcome the markets are seeing as extremely favourable.

In the Index Futures segment, FIIs added 10,000 long contracts on May 31, but more notably, they added 31,000 short contracts. This has resulted in a long-short ratio of 14:86 percent, with net shorts now standing at 3.2 lakh contracts. "The long-short ratio based on FII index positions is at its lowest level since October 2023, which is currently at 13-14 percent, implying the dominance of short positions," said Sudeep Shah, Head - Technical and Derivatives Research, SBICAP Securities.

This move follows an unprecedented addition of net index shorts by FIIs earlier on May 30, marking the highest ever net index shorts in a single session in market history. On that day, FIIs increased their net shorts from 5,000 contracts to 2.97 lakh contracts, and dramatically reduced their long positions by 80 percent, from 257,000 contracts to 51,000.

This sharp action led to the FII long-short ratio plummeting from 50 percent to just 13 percent, reflecting heightened caution ahead of the highly anticipated general election results.

FIIs' shorts may need quick covering as markets may jump

The market responded with significant declines, with benchmark indices Sensex and Nifty falling nearly 1 percent each on May 30. Both indices closed with marginal gains on May 31.

These recent heavy short positions by foreign investors may see significant pressure on June 3, when the market opens for the first time after the exit poll indicated favourable election results. "Given the indications from the exit poll numbers, the current level of long-short ratio could act as an important trigger for short-covering rally," said Shah of SBICAP Securities.

Market experts suggest that a 500-600 point jump in Nifty in a single day is possible. This optimism is also helped by strong GDP numbers. Social media buzz and grey market activity also hint at Nifty potentially crossing 23,000 on Monday, representing a jump of over 500 points or more than two percent from current levels.

Key resistance and support levels

The weekly Nifty Call options data showed that the 23,000 strike price holds the highest open interest at 65.01 lakh contracts, marking it as a crucial resistance level for Nifty in the short term. Following this were the 24,000 strike with 63.04 lakh contracts, and the 23,500 strike with 57.45 lakh contracts.

On the Put options side, the 22,000 strike exhibited the maximum open interest with 31.47 lakh contracts, indicating it as a key support level. The 22,500 strike followed with 29.36 lakh contracts and the 21,500 strike with 25.32 lakh contracts.

Call and Put options writing activity

Significant Call options writing was observed at the 23,500 strike, which saw an addition of 26.8 lakh contracts. This was followed by the 23,000 strike and the 24,000 strike, which added 25.90 lakh and 21.37 lakh contracts, respectively. Minimal Call unwinding was noted.

For Put options, the 21,500 strike experienced the maximum writing with an addition of 12.56 lakh contracts. This was followed by the 22,600 and 22,500 strikes, which added 10.3 lakh and 9.36 lakh contracts, respectively. Put unwinding was seen at the 23,100 strike, shedding 91,375 contracts, and at the 22,700 strike, which saw a reduction of 9,075 contracts.

Put-Call ratio

The Nifty Put-Call ratio (PCR) decreased to 1.00 on May 31 from 1.12 in the previous session. A PCR above 0.7 typically indicates a bullish sentiment, while a ratio below 0.7 suggests a bearish outlook.

India VIX: Volatility inching up

India VIX, the volatility index, rose by 1.77 percent to close at 24.60, the highest level since May 25, 2022. On a weekly basis, the index increased by 13.32 percent, continuing its uptrend for the fifth consecutive week.

FIIs funds flow in futures and options

On May 31, 2024, FIIs activity in derivatives included buying index futures worth Rs 8130.2 crore and selling Rs 9180.9 crore, resulting in a net sale of Rs 1050.7 crore. In index options, FIIs bought Rs 5.91 lakh crore and sold Rs 6.17 lakh crore, leading to a net outflow of Rs 26,452 crore.

Also read: Nifty expected to open gap up, breaching 23,000 on Monday driven by strong exit poll results

Market commentary

Prabhudas Lilladher noted that the Nifty index opened near the 22,600 zone and, amid significant volatility, maintained support near 22,420 levels before an important event, closing near 22,530 levels. After forming a higher top at 23,100 on the daily chart, Nifty has corrected towards the significant 50 EMA zone at 22,400. Currently, it is precariously positioned before the election outcome. A decisive breach above the 22,800 zone could improve the market bias and potentially lead to further gains.

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