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Traders should cut back on exposure, focus on capital preservation as a priority

Investors holding long portfolios with a multi-year view can remain invested. Short to medium term traders should exit weak stocks and hold blue chips primarily.

February 28, 2021 / 07:26 PM IST

The markets ended the week ended February 26, 2021, on a bearish note. The decline on Friday was substantial enough to trigger losses of 3.02 percent on the Nifty and 2.90 percent on the Bank Nifty on a WoW basis.

Notably, the selling persisted till the fag end of the trading session. Being the first day of the new derivatives series of March it put further pressure on the bulls as they paid cost of carry to roll over their longs which are under water. The cost of carry is a major pain point for real world traders as it adds up month after month and raises the buying cost. The hurdle rate for the bulls just got higher.

Look at the basis chart below. It denotes the futures premium over spot. Note how the basis has fallen sharply on Friday. Do note that tis also impacts options premia especially for the call options buyers. Traders who have taken the options route to go long have seen sizeable erosion in the call option premiums.

Image42822021The problems of the stock and index futures buyers are more extreme. They are liable to make good mark-to-market losses and span margins. If the markets fall further they will have to cough up more money. Brokers will trigger margin calls (demand additional mark-to-market margin money) which can trigger unwinding of leveraged long positions under duress.